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A. SYNOI^SIS 



OF THE FIRST THREE BOOKS OF 



JOHlSr STtJ-A.K.T 3N^ILL'S 



PRINCIPLES 



POLITICAL ECONOMY. 



AS REVISED BY PROF. J. L. LAUGHLIN. 



WITH AN APPENDIX CONTAINING THE RECENT 

EXAMINATION PAPERS IN POLITICAL 

ECONOMY I. 

Copyright by W. H . Wheeler. 



€amtrribg«, Pass. 

Published by W. H. Wheeler, 

1888. 



A. SYN^OP»SIS 



OF THE FIRST THREE BOOKS OF 



PRINCIPLES 



POLITICAL ECONOMY. 



AS REVISED BY PROF. J. L. LAUGHLIN. 



WITH AN APPENDIX CONTAINING THE RECENT 

EXAMINATION PAPERS IN POLITICAL 

ECONOMY I. 



^ 



Published by W. H. Wheeler, 

iS88. 



tijj / ^ 



This Synopsis is intended to replace the text book in preparing 
for the examinations, but it will also be found extremely useful 
during the year in answering the weekly written questions. The 
index at the end has been prej^ared especially for use in connection 
with the examination papers contained in the appendix to this 
book, and in the second appendix to the text book. 



C9^ 



CONTENTS. 



BOOK I. — PRODUCTION. 

CIIAPTEK PAGE 

I. The REqyisLTES of Production ...... 3 

II. Unproductive Labor ........ 4 

III. Capital 5 

IV. Fundamental Propositions respecting Capital . . 5 
V. Circulating and Fixed C.\pital ..... 9 

VI. Causes affecting the Efficiency of Production . 10 

VII. The Law of the Increase of Labor . . . . 12 

VIII. The Law of the Increase of Capital .... 12 

IX. The Law of the Increase of Production from Land 14 

X. Consequences of the Foregoing Laws .... 15 

BOOK II. distribution. 

I. Property .......... 17 

II. Wages • . 21 

III. Remedies for Low Wages . , 24 

IV. The Differences OF Wages in Different Employments, 26 
V. Profits . . .' 28 

VI. Rent 30 



BOOK III. 



exchange. 



I. Value, and the Laws of Value 

II. Ultimate Analysis of Cost of Production . 

III. Rent in its Relation to Value . , 

IV. Money 

V. The Value of Money as Dependent on Demand 

Supply . . 

VI. The Value of Money as Dependent on Cost of 
duction ........ 

VII. A Double Standard and Subsidiary Coins . 

VIII. Credit as a Substitute for Money 

IX. Influence of Credit on Prices 

X. An Inconvertible Paper Currency 

XI. Excess of Supply 

XII. Some Peculiar Cases of Value 

XIII. International Trade ...... 

XIV. International Values . . . . . 



Pro 



33 
36 

40 

41 

43 

45 
46 

47 
49 
49 

5^ 
53 

54 
57 



CHAPTUH I'AOE 

XV. MoxEY AS AN Imported Com.mouity . . . . 6o 

X\'I. The Foreign Exchanges 6i 

XVII. The Distribution of the Precious Metals through 

THE World 63 

XVIII. Influence of the Currency on the Exchanges and 

on Foreign Trade 65 

-XIX. The Rate of Interest 67 

XX. The Competition of Different Countries in the 

SAME Market 68 

XXI. Distribution, as affectej) by Exchange ... 70 

Appendi.x — Rxamiitation Papers ....... i 

Index viii 



A SYNOPSIS OF MILL. 



BOOK I. 



ON PRODUCTION. 



CHAPTER I. 

REQUISITES OF PRODUCTION. 

1. Labor. 

2. Appropriate natural objects. 

3. Capital (needed as soon as time enters into consideration, or divi- 
sion of labor is introduced). 

Labor is either bodily or mental. 

Laborer's sacrifice = abstinence of capitalist. 

When a thing is practically unlimited it has no exchange value, p. 54. 



f I. Natural agents (land). 



'i. Direct (baker of bread). 

'l. In producing maiert'als (miner, farmer, 

c J T V, • J miller). 

Q -{ 2. i^abor. ■{ 2. In producing ?V«//e?;ze«/s (oven maker). 

3. Yor protection (police). 

2. Indirect. \ 4. For transportation (teamsters, railvi^ay 

men). 

5. In /r«?»/«^ human beings (teachers). 

6. Inventors (improvers of ovens & flues). 



3. Subsistence during operation — Capital. 



The previous employment of labor is indispensable to every productive 
operation, p. 57. 

A capitalist has a right to demand a reward for his abstinence from con- 
suming the products of labor in his possession. 



MILL S PRIXCIPLES OF POLITICAL ECONOMY. 



CHAPTER ir. 

UNPRODUCTIVE LABOR. 

Labor is indispensable to production, but has not always production 
for its effect. Much very useful labor is unproductive, p. 60. 

Productive Labor Creates Wealth. 
Unproductive Labor does not Create Wealth. 

It is hard to distinguish between productive and unproductive labor- 
ers, because much labor is indirect, p. 60. 

Productive labor may be wasted, when more is expended than is neces- 
sary to production. 

Productive Consumption is the w^ealth consumed by pro- 
ductive laborers in keeping up, or improving, their health, 
strength, capacity for work, or in I'earing productive laborers. 

All their consumption beyond this is unproductive consumption. Some 
enjoyment is necessary to health. 

Unproductive Consumption is the consumption of non- 
producers, and also the superfluous consumptioi; of producers. 

No labor for the use of unproductive consumers tends to enrich the 
community. 

Only part of the product of a country is consumed productively, the 
rest supplies the unproductive consumption of producers, and the whole 
consumption of the unproductive class. 

Anything w^hich is transferable, limited, and which satisfies a 
want or desire is WEALTH. ; 



The world consists of 



Idlers or unproductive laborers. 

Unproductive consumers. 

p. 64. 

(Short and important). 



B. ; . 

Productive laborers, c.^^. farrners. 

1. Those producing wealtH for 
productive consumption, ' i an- 
nual produce. 

2. Those producing wealth for 
unproductive consumption (a) 
i produce. 



mill's principles of political economy. C 

CHAPTER III. 

OF CAPITAL. 

Capital is the accumulated stock of the produce of labor. See below- 
What capital does for production is, it affords the shelter, protection, 

tools, and materials needed for the work; it also feeds and maintains the 

laborer during the process. 

Capital is saved wealth devoted to reproduction, pp. 66, 67. 

Money only a part of capital and wealth. 

Not all capital is money. Not all wealth is capital. 

The conversion of wealth from an unproductive destination to a pro- 
ductive one causes more food to be appropriated to the consumption 
of productive laboi-ers. p. 68. 

The distinction between capital and non-capital lies, not in the kind of 
commodities, but in the mind of the capitalist; vai-ying as it is destined 
to productive, or non-productive uses. 

The luhole of the. capital of a country is devoted to production, tvith some 
limitations, 

LIMITATIONS. p. 68. 

1. A fund may seek productive employment, but find none to suit the 
possessor. It is still capital, but unemployed capital. 

2. The stock may consist of unsold goods, not at the time marketable. 
It is then unemployed capital. This is unimportant. Goods are market- 
able at a low enough price. If nobody wants them they are, by definition, 
not wealth, and .*. not capital. 

3. A tax payable in advance may be levied. This necessitates a larger 
capital than is necessary to production, p. 69. 

4. Rent may be payable in advance, similar to 3. 

5. All the capital paid as wages is not necessary for production. Some 
is expended, not in supporting labor, but in remunerating it. Laborers 
could wait for remuneration. 

Abundant capital must have been accumulated to allow any remuneration 
of labor before production is finished, p. 70. 

See examples of capital and wealth on pages 70, 71, 72 and 73 of Mill. 



CHAPTER IV. 

FUNDAMENTAL PROPOSITIONS RESPECTING 
CAPITAL. 

Industry is limited by capital. 

Industry must have materials and food, both capital produced by pre- 
vious labor. 



O MILL S PRINCIPLES OF POLITICAL ECONOMY. 

Laborers consume what has been produced, not Avhat is about to be. 
Although industry is limited by capital, it does not alwaj'S reach that 
limit. Often capital cannot obtain as many laborers as it wants. 

Government can create capital by laying taxes and employing 
the revenue productively. 

It may also use the revenue in paying the Public Debt. 

The fund-holder would still wish to have an income from his money, 
and so would invest it productively. 

Taxes are largely paid out of wealth destined to unproductive consump 
tion. 

Ever}' increase of capital can give unlimited additional em- 
ployment to industry. 

If human beings are capable of work, and when there is food to feed 
them, they may always be employed in producing something, p. 76. 

It is a common error that the unproductive expenditure of the 
rich is necessary to the employment of the poor. 

Employment is given to labor, not by the expenditure of 
wealth, but by capital. 

If a capitalist stops his unproductive consumption, he only transfers it 
to labor. 

When capitalists turn their income into capital, they do not destroy 
their power of consumption, but transfer it to a number of laborers. 

Either there is, or there is not, an increase of laborers proportionate to 
the increase of capital. 

1. If there is. Necessaries are produced for the new population instead 
of luxuries for the old, and this supplies exactly the amount of employ- 
ment which was lost. 

2. If there is not. What was formerly expended in luxuries is now dis- 
tributed among laborers as additional wages. They are already supplied 
with necessaries. The laborers now buy luxuries. Thus the many have 
them instead of the few. 

The limit of wealth is never deficiency of consumers, but of 
producers and productive power. 

Every addition to capital gives labor additional employment 
or lemuneration. 

Laborers get more by the abstention of capitalists from un- 
productive expenditure, than by such expenditure. 

Capital is the result of saving, p. 79. 

The idea of saving implies the productive use of the savings. Savings 
not destined to be used productively are merely hoarded, and are not 
capital, p. 80. 



MILLS PRINCIPLES OF POLITICAL ECONOMY. ^ 

Capital, although saved, and the result of saving, is never- 
theless consumed. 

" Saving" does not imply that what is saved is not consumed, or that 
consumption is deferred; but that if consumed immediately, it is not con- 
sumed by the saver. Part goes into fixed and circulating capital, and 
part into wages, p. 8i. 

Everything which is produced is consumed, both what is 
saved and what is spent. 

The greater part of existing wealth has been produced in the last year. 
Land is almost the only thing which subsists, p. 82. 

This perpetual consumption and reproduction of capital ex- 
plains the rapid recovery of countries devastated by v/ar. 

If the effective population is not extirpated or starved afterwards, and 
if the lands and permanent improvements are not seriouslj' injured, a 
country can produce nearly as much as before. If the people have food 
enough to keep them in working condition, the country will be as rich as 
before, if they exert themselves ordinarily. Involuntary privation pro- 
duces the same results as intentional abstinence, p. 83. 

The world has at any given time the power to create a certain 
amount of wealth. Increased power of production allows 
the total wealth to be enlarged. 

Labor, land, and capital are needed to produce wealth ; if labor and land 
"are intact, all previous capital is not needed. If necessaries and tools 
exist, previous wealth will be recreated. 

Taxes ai-e paid from unproductive consumption generally, 
and are made up by increased economy. Government loans are 
drawn from capital and impoverish the country. 

Yet when loans are made, the country seems prosperous, the wealth 
and resources seem to inci-ease. p. 84. 

Suppose the whole amount borrowed and destroyed by the Government 
is taken from capital. It cannot be taken from fixed capital and must be 
taken from wages. Laborers will suffer, but if their working condition 
is kept up, their labor will produce as much as it would with hioher 
wages. Their unproductive consumption is stopped. The emplovers 
gain what the laborers lose by diminished w^ages, and the breach in the 
capital of the country is repaired by the privations of the laborer, p. S^;. 

Dr. Chalmers says that, when the Government needs money, 
it is better to lay taxes for the whole amount, rather than to 
make interest-bearing loans. 

Objection. When the whole amount is called for in i year, the people 
cannot, without great hardship, pay it out of their yearly income. .-. It is 
better to require a small sacrifice yearly as interest, than a great one once 
for all. 



8 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



Answer. The same sacrifice is made in either case. All the wealth 
produced yearly forms part of somebody's income. By taking the amount 
needed as loans instead of taxes, the privation is not averted, but is thrown 
on the laboring classes who least ought to bear it. 

All the inconveniences caused by taxes for the perpetual payment of 
interest are incurred in pure loss. 

Whenever the State withdraws capital fi-om production, the whole sum 
is withheld from labor. The loan is paid off the same year, the sacrifice 
is actually made; but it is paid to the wrong persons by the woi'st of 
taxes (tax on laborers) and does not extinguish the claim, p. 86. 

After having made the whole effort 7ieeded to pay the debt., the country 
is still charged vjith it and its interest, p. 86. 

Objection. This statement is extreme. Loans are usually made fix)m 
foreign capital which would not be brought in on less than Government 
security. In wealthy countries, loans are not made from native employed 
capital, but from accumulations which would otherwise have gone 
abroad, p. 87. 



DEMAND FOR COMMODITIES IS NOT DEMAND 
FOR LABOR. 

It merely determines the direction in which the productive 
engine, capital and labor, shall work. p. 88. 

Wealth offered for commodities necessitates the use of other wealth as 
capital to support labor, p. 88. 

Wealth paid as wages, or advanced to producers, itself sup- 
ports labor, p. 89. 

(i) Wealth offered directly to laborers employs more labor than when 
merely offered in exchange for other goods; (2) an increased demand 
for commodities does not call for an increase of labor, since this can only 
be created by capital. 

Corollaries of 2. («) When a home demand for commodities is created 
by legislation, it does not of itself give additional employment to labor. 

{b') Taxes on luxuries of the rich do not fall on the poor because of a 
lessened demand for commodities. 

When the taxes on the rich are paid out of wliut would have been 
wages, — 

1. If the Government buys labor, the tax does not fall on the poor. 

2. If the Government dissipates it in war, it ceases to exist as capital, 
and less laborers can be employed. 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



CHAPTER V. 

CIRCULATING AND FIXED CAPITAL. 

That part of capital, which, after being once used, exists no 
longer as capital, is called Circulating Capital, e.g. mate- 
rials and wages, p. 93. 

It is constantly parted with, is constantly renewed, and does its work 
by changing hands. 

That part of capital which consists of more or less durable 
instruments of production, whose efficacy is not exhausted by a 
single use, is called Fixed Capital, e.g. implements, build- 
ings. 

This does its work by being kept. Capital sunk in permanent improve- 
ments of land is of this kind, as the cost of making docks, roads and 
canals. Many kinds of fixed capital need to be renewed. 

A stock of uHsold goods is (although destined to productive uses) not 
capital in actual use. It must first be exchanged, and will become either 
fixed or circulating capital. 

All increase of fixed, at the expense of circulating capital 
hurts the laborers. 

Some say that machinery never injures the laborers, p. 95- 

Argument. By cheapening production it increases the demand for the 
commodity, and more persons are employed in producing it. True, often, 
because more capital of both kinds is employed, p. 96, 

Objection. Laborers no better off" by the transfer of capital from circu- 
lating to fixed. Laborers suffer in the industry whose fixed capital is 
increased. 

Argument. Equivalent employment is offered in other industries to 
the labor thrown out of employment by machinery, because consumers 
save in the cheapened commodity enough to inci-ease their demand for 
others. 

Objection. A demand for commodities is not a demand for labor, p. 97. 

Improvements in production are seldom even temporarily in- 
jurious to labor. 

If many improvements were made suddenly, the fixed capital would 
be drawn from the circulating. This would injure laborers. Improve- 
ments are introduced gradually by the use of annual increase. 

Great increases of Fixed Capital are alivays accompanied by corres- 
ponding i7tcreases of Circulating Capital. 

Even if improvements tended to diminish the aggregate produce and 
circulating capital, by causing increased accumulation they would finally 
increase both. p. 98. 



lO MILL S rRIXCirLES OF POLITICAL FXONO.MY. 

Improvements tend to remove the limits of accumulation of 
capital and of increased production from land. 

Argume7it 171 favor of Machi7ieyy. 

The quantity of capital and the gross produce of a country are propor- 
tionate to the state of the arts of production tliere. Machinery makes 
room for a larger amount of both. p. 99. 



CHAPTER VI. 

CAUSES OF THE EFFICIENCY OF PRODUCTION. 

The most evident causes of superior productiveness are, — 

r a. Fertility of the soil. 

^T , 1 A 1 ^ \ b. Favorable climate. 

I. Natural Advantas^es. < ^,. , 

* I c. Minerals. 

\d. Good communication. 
In Iiot regions mankind needs less fuel, clothing, housing, food. Abun- 
dance of conveniently situated minerals is a great advantage. A maritime 
situation, or good navigable rivers, is a great advantage by saving the cost 
of carriage, p. 100. 

3. Great and habitual energy of labor. 

3. The extant state of skill and knowledge. 

The production of a people is limited by their knowledge of the arts; 
any improved application of natural forces enables the same labor to 
produce more. 

Want of good sense, which makes laborers such bad calculators, renders 
their labor less productive. 

4. The moral qualities of the laborers, p. loi. 
e.g. The temperance, steadiness, trustworthiness of laborers. 

5. The sjcurity or completeness of the protection furnished 
by society to its members. 

6. Habits of cooperation and division of labor. 

Sometimes a number of people must cooperate, as in rowing boats, p. 

I03. 

Without separation of employments, few tilings would be produced at 
all, for if each person had to produce all he consumed, his wants would 
be few. 

By division of labor a population is stimulated to increase its produc- 
tion so that it can obtain luxuries, which it never could have obtained 
otherwise, because it never could have produced them. The introduc- 
tion of mechanics among an agricultural population constitutes a market 



MILL S PRINCIPLES OF POLITICAL ECOKOMY. I I 

for surplus food. Their arrival enriches the settlement; (a) by the manu- 
factured articles; (^) by the increased production of food. 

A couut)y seldom has a productive agriculture xvithouf a large tozvfi 
population. 

The farther the division of labor is carried the more productive does it 
become. 



CAUSES OF THE INCREASED EFFICIENCY OF LABOR BV 
DIVISION OF EMPLOYMENTS. 

1. Increased dexterity in the workman, p. 105. 

When a thing is done frequently, it is not done better necessarily', but 
more easily. 

2. Saving of time in passing from one employment to another. 
This is somewhat counterbalanced by the rest given by a change of 

occupation, as different muscles are used. 

3. Inducement to invent labor-saving machines, p. 106. 
The attention of laborers is directed toward saving of labor. Not always 

true, as inventors have often invented in lines very remote from their 
own employment. 

4. The more economical distribution of labor by classing 
laborers according to their capacity, p. 107. 

5. Effectiveness of industry is proportionate to adaptation of 
person to employment, and of industry to locality, p 108. 

EVERY INCREASE OF BUSINESS ENABLES THE WHOLE TO BE 
CARRIED ON AT A PROPORTIONALLY SMALLER COST. 

This can be determined by test. Whenever large and small establish- 
ments exist together, the one which produces most cheaply will under- 
sell the other, p. log. 

The time of the manager is saved, i.e. fewer superintendents are re- 
quired in a large business than in many small ones. p. no. 

Producion on a large scale is facilitated by the forming of 
joint stock companies. 

(«) Because many undertakings require more capital than individuals 
could furnish. Government agency is inexpedient. 

{b) A more intellectual head can be secured, p. iii. 

Objection. A large system is only advisable when there is a lai-ge 
market. 



I 2 mill's principles of political economy. 

CHAPTER VII. 

LAWS OF THE INCREASE OF LABOR. 

The increase of lal^or is the increase of mankind, which has 
immense powers of multiplication, p. ii3. 

It increases in a geometricnl i^atio, and can easily double every 20 years, 
p. 115. 

LAW OF MALTHUS. 

POPULATION TENDS TO INCREASE FASTER 
THAN THE MEANS OF SUBSISTENCE. 

Opposing Forces. 

Population is kept down by 

1. Absolute starvation in times of scarcity. This is the "Posi- 
tive Check." 

2. (In a higher state of Civilization.) Limitation of births. 
"Preventive Check." 

( a. Fear of want. 

^ ,1 \ d. Desire to better or maintain present condition. 

Caused by ^ t • v ^- t • 1 i\ c*. ^ 

•^ } c. Limitation 01 marriages b}' the State. 

\^d. Limitation of marriages by customs of living. 

IMPROVEMENTS IN THE CONDITION OF LABORERS ONLY GIVE 

A TEMPORARY MARGIN, SOON FILLED UP BY 

INCREASED NUMBERS. p. IlS. 

To get a happier, not a more numerous people : 

1. They must be intellectually and morally educated ; or, 

2. The standard of living must be raised, p. 119. 

Small holdings limit the thoughtless increase of tiiivibers. France for 
example. 

CHAPTER VIII. 

LAWS OF THE INCREASE OF CAPITAL, p. 120. 

Increase of capital depends upon 

I. The amount of surplus wealth over necessaries. 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



13 



2*. The strength of the desire to save, which is less: — 
(a) In unhealthy climates and occupations, c. g-. sailors. 
(i5) In insecure localities, e. g. Burmah. 
(c) Because of want of appreciation of future good from 

present sacrifice, e. g. St. Lawrence Indians. 
id) Because of wantof interest in others, e. g. Later Rome. 
After necessaries of production are supplied a surplus is left from 
which must come : — 

1. Unproductive consumption of producers. (Savable.) 

2. Subsistence of unproductive consumers. 

3. Additions to capital, p. 121. 

Corollaries. 

1. The greater the produce, the greater the possible saving. This also 
partly determines how much will be saved for : — 

2. The greater the possible profit, the stronger the motive for accumu- 
lation, other things being equal, p. 123. 

Corollaries. 

(i) All accumulation involves the sacrifice of a ^rese7it for a future 
good. The ability to see that the future good is greater than the present 
sacrifice is the test of civilization. 

(2) Whatever strengthens probability that our accumulations ivill be 
enjoyed by ourselves or friends strengthens the effective desire of accumu- 
lation. 

a & b. Unhealthiness and insecurity diminish the probability that 
we shall enjoy what we save. p. 124. 

c. Uncivilized races will not work when the returns are distant, because 
they cannot see that the gain is greater than the trouble. 

(3) Durability marks a high degree of effective desire of accumulation. 
Chinese build frail houses, etc. They work when returns are distant, 

but not when very distant. Defect of providence, not of industry, limits 
production among Chinese, p. 125. 

STATIONARY STATE. 

When production has been carried so far that the returns from capital 
hardly satisfy the average effective desire of accumulation, the country is 
in the stationary state. No additions to capital will be made, unless the 
arts of production increase, or effective desire strengthens, p. 127. 

No more capital can be employed at the existing rates of interest, and 
no more capital will be accumulated to be employed at lower rates. 

There is no limit to the possible increase of labor and capital, the limit 
depends on the properties of land. 



H 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



CHAPTER IX. 

THE LAW OF THE INCREASE OF PRODUCTION 
FROM LAND. 

Land is limited in quantit}', and in productiveness. 

THE LAW OF DIMINISHING RETURNS, p. 130. 

AFTER A CERTAIN NOT VERY ADVANCED STAGE IN AGRICUL- 
TURE, AN INCREASE OF LABOR DOES NOT INCREASE THE 
PRODUCE IN AN EQUAL DEGREE. p. I3I. 

This is the foundation of political economy. This law has not set in 
when more labor and capital are needed to give all the land its maximum 
product, p. 132. 

When inferior land (/. e. land which with equal labor gives less produce) 
is resorted to, the produce, evidently, does not increase proportionately to 
labor. Land is inferior in fertility or situation. 

Transportatio7i is part of the cost of production. 

Produce from inferior lands costs more, and the price increases. If it 
were not for the law of diminishing returns inferior lands would never 
be used. 

Sometimes an immense increase of labor and capital on cultivated lands 
brings }?iore than a proportionate increase, p. 135. 

Actual facts do 710 1 give the expected res2cltshccause of opposing agencies 
caused by the progress of civilizatioji, 7iamely, 

THE PROGRESS OF AGRICULTURAL SKILL, KNOWLEDGE, 
AND INVENTION. 

Agricultural improvements are of two classes. 
I. Those which increase the produce without increasing the 
labor in proportion. 

a. Rotation of crops, with the disuse of fallows. 

b. The introduction of new valuable plants, c. g. turnips, which enter 
into rotation with great advantage. 

c. Introduction of new articles of food, e. g. potatoes. 

d. Introduction of new manures. 

e. Increased knowledge of the application of manures. 

f Improvements in the soil itself by subsoil ploughing and draining. 
g. Improvements in the breeding and feeding of workingcattle. p. 136. 
h. Increased number of waste-eating food-producing cattle. 



mill's principles of political economy. 



15 



2. Those which diminish hibor, but do not increase produc- 
tiveness. 

a. Improved construction of tools. 

b. Use of machinery which saves labor. 

c. Improvements in transportation. 

d. Improvements in manufacturing processes, p. 13S. 
Thus railways and canals diminish cost of production, p. 140. 

The materials for manufactures come from the hind, .-. th.e 
hvw of diminishing^ returns applies to manufactures. But: — 

The cost of materials forms but a small part of the cost of manufactured 
articles. Labor-saving machines increase with immense rapidity .-. p. 
141. 

Ths causes of increased productiveness prevail over the law 
of diminishing returns in manufactures. 
This is shown by the fall in prices, p. 142. 

SECONDARY CAUSES OF INCREASED PRODUCTIVENESS IN MANUFACTURES. 

1. Improvements in Government and morals. 

2. Improvements in education. 

3. Improvements in general character of laborers. 

4. Community of interest between labor and capital. 

THE LAW OF DIMINISHING RETURNS APPLIES TO EXTRACTIVE 
INDUSTRIES. p. 143. 

RESUME OF CHAPTER IX. 

All limited natural agents, long before their productive power 
is stretched to the utmost, yield to additional demands on harder 
terms. This law is suspended by anything which adds to the 
humin knowledge of the properties and powers of natural 
asrents. 



CHAPTER X. 

THE CONSEQUENCES OF THE PRECEDING LAWS. 

The limit to increased production comiesfrom, 
I. Lack of capital. 2. Lack of land. 
In countries where effective desire of accumulation is low, industry 
must be stimulated by improvements in production. 



i6 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



In countries where it is high, the increase of capital is checked by 
smallness of returns, p. 145. 

Tlie tendency of returns to progressive decrease lowers the condition 
of producers, and would soon stop increase of production. It is a conse- 
quence of the law of diminishing returns, p. 146. 

Corollaries. 

A large number of people can never be as well off as a small number. 

The laws oi nature not society cause misery from over population. 

An unjust distribution of wealth causes the evil to be felt earlier, but 
does not aggravate it. 

New mouths need as much food as the old, and the accompanying 
hands do not produce as much as the old ones. p. 146. 

After the density of population is sufficient to insure all the benefits of 
combination of labor, further increase tends to lower condition of people, 
but improvements counteract this. p. 148. 

Improvements never can come up to the capability for human increase, 
but they have equalled the present limited increase. 

If the population had been still more limited, the condition of all 
would have been much bettered by improvements, instead of the margin 
being filled by increased numbers. 

REMEDIES FOR OVERPOPULATION. 

When the law of diminishing returns begins to set in, and the rate of 
increase is still unchanged, these things will mitigate its efiects. 

1. Importation of Food. 

The admission of cheap foreign food equals an agricultural invention 
at liome which would reduce the cost by the same amount. 

The laborer gets more food for the same labor, but the pressure soon 
retLirns from inci'eased numbers. 

Excessive over population always raises the general price of food. For 
food is raised on limited areas, which are not large enough to supply a 
great demand without great exertion ; in any case, the quantity of food 
which can be obtained without increase of proportional cost is limited. 

Two classes of countries can export, 

(rt) Countries with large effective desire, but their own increasing popu- 
lation must be provided for. and exporting soon ceases. (/;>) In some 
countries the population is less than the food and, owing to their backward 
stale, they can export. 

The law of diminishing returns applies also to food-importing lands, 
p. 150. 

2. Emigration. 

The relief from this is real, as it simply adds available land. 
No stream of emigration could be kept up which would remove the 
excess of population over food if Increases were unchecked, p. 151. 



BOOK II. 
DISTRIBUTION. 

CHAPTER I. 

PROPERTY. 

The laws of pi-oduction are physical truths, with nothing optional or 
arbitrary about them. p. 155. 

The laws of distribution of wealth are solely a matter of human insti- 
tutions, p. 156. 

Society has always rested on Individual Property. Tribunals arose 
to repress violence, and called possession rightful ownership. 

Suppose a body of colonists in a new country, they can have either : 

1. Private Property. 

Land and tools would bey^^/r/y divided at the outset, and each individual 
would provide for himself. Or, 

2. Community of Goods. 

Everything would be held in common. Production would be managed 
by the magistrates. Products would be divided as the people might wish. 

OPPONENTS OF INDIVIDUAL PROPERTY. 

1. Those vv^ho v^ish absolute equality in the distribution of 
the physical means of life and enjoyment. "Communists," 

P- 157- 

2. Those who admit inequality, but wish wealth to be dis- 
tributed according to justice or expediency and not by accident 
as now. 

Socialists. 

A self given name of the English Communists. On the Continent it 
does not imply the abolition of private property, but that governments or 
associations should possess the land and instruments of production. 

Socialism to-day is usually applied to 

Those who wish to abolish private property, and give the 
capital, land, and labor of a country over to State control. 

Collectivism=:State Socialism. 



1 8 mill's principles of political economy. 

OBJECTIONS TO COMMUNISM. 

1. Each person would try to avoid his fair share of work. 

Answer. This evil exists anyway. A "master's eye" cannot be every- 
where, but a Communist would be watched by the whole Community. 
Communist labor would be less effective than that of laborers working for 
themselves, but more effective than that of hired laborers, p. 15S. 

2. If every man were sui'e of subsistence for himself and 
children, prudential restraint would cease, and population would 
increase until starvation was reached. 

Anstver. Any increase of numbers which increased the toil of the 
masses would then (it does not now) cause immediate inconvenience to 
every individual. This misery could no longer be imputed to the avarice 
of employers or the privileges of the rich. Public opinion would force 
the reckless to apply the prudential check. 

3. It would be impossible to divide the labor fairly, as there 
is no common standard between different kinds of work. p. 159. 

The same quantity of work is an unequal burden on people of different 
physical capabilities, the feeling of justice would revolt against nominal 
equality of labor for persons unfit to bear it. 

Communism with all its chances far better than Society as it 
IS NOW. But ; — 

To make a fair comparison, we must compare Communism at its best 
with individual property, not as it is, but as it might be made. 

Private property has never yet conformed to the principles which justify 
it. Property has been made of things which should not be, and absolute 
property of things which ought to be qualified property. 

Private property is defensible only when it means the guaran- 
tee to individuals of the fruits of their own labor and abstinence. 

Intestate inheritance not part of the institution and often conflicts with 
the principles which legitimize it. 

POSSIBLE DESTINATION OF PRIVATE PROPERTY. 

Everything must be rectified which is opposed to the 2Drinciple 
of proportion between exertion and reward. 
We must also have : — 

1. Universal education, p. 160. 

2. Due limitation of population. 

Without these two, neither Communism nor anj' other system could 
make the condition of the masses other than miserable and degraded. 
With these, tiiere could be no poverty, even under the present system ; and 
this being supposed, the question is, not as the Socialists say, a question 



t MILLS PRINCIPLES OF POLITICAL ECONOMY. TQ 

of flying to the only refuge against present ills, but a mere question of 
comparative advantages. 

The decision will depend upon the consideration, which of the two 
systems gives the greatest amount of liberty and spontaneity. 

SCHEMES OF SOCIALISTS. 

1. Complete State control. 

2. Separate communities inside the State, but under its pro- 
tection. 

The object of most Socialists is to have the State control the production 
and distribution of wealth, p. i6i. 

Origin of Socialism was in France, its activity is now greatest in Gei-- 
many. 

KARL MARX. 

The only Socialist who pretended to economic knowledge. 

His idea of Value. The amount of labor necessary to production is 
the sole measure of value. 

The right of property in manufactures vests wholly in the laboi-er. 
Capitalists are robbers. 

No just system can exist while fi-ee contract exists, therefore all property 
must be nationalized. 

There must be absolute equality of wages (thus removing the incentive 
to superior skill), p. 162. 

The System of Lasalle and Liebknecht. 

LOUIS BLANC. 

Government to establish State workshops from abolition of collateral 
inheritance. Private competition would be crushed, p. 162. 

Communists wish to exchange the good of the present system for the 
evils which would result from carrying on social life without the motive 
power, p. 165. 

Two Non-Communistic Socialist schemes are totally free from the 
objections to Communism, p. 166. 

I. SAINT SIMONISM. 

This contemplates an unequal division of produce, and that all should 
be occupied according to capacity and vocation. 

The authorities assign the functions and also the salary due to the merits 
of the worker. (No human beings could do this justly.) 

2. FOURIERISM. 

This is the most skilful form of Socialism. 
Capital and labor are both important. 



20 mill's principles of political ecoxomv. 

No abolition of property,. or inheritance. 

"Phalansteries" are territorial industrial associations. 

A minimum is assigned for the subsistence of the Avhole community. 
The remainder of the product is to be divided between labor, capital, and 
talent. 

The capital is owned by the members in unequal shares, with propor- 
tional dividends. 

Talent is estimated by grades conferred by the choice of fellow-workers. 

Separate households living in large buildings. Co-operative stores, etc. 

Objection. Such communities suffer from want of family life and of ex- 
ecutive ability. The independence of younger members carries them 
awaj'. 

ATTACKS ON SOCIAL ORDER ARE VIGOROUS AND EARNEST BUT 
EXAGGERATED, AND IN ANSWER IT MAY BE SAID THAT ; 

1. The wages of laboi' in Europe are very insufficient, but it 
has yet to be proved that real wages, or even money wages, are 
declining anywhere, p. 169. 

2. Socialists see one-half of competition and overlook the other. 
They forget that competition is the cause of high prices as well as 
of low. 

3. Socialists do not understand the proportion of the product 
which goes to capital, p. 170. 

Labor gets the capital, and the capitalist gets only the profit. He cannot 
have both. 

The schemes for State management of production have a case 
for trial, and may eventually be preferable, but have yet to make 
good their claim, p. 171. 

CONSIDERATIONS TO BOUND PRIVATE PROPERTY. 

The foundation of private property is the right of every person 
to get what he can for his faculties, and to dispose of his reward 
as he pleases. 

Bequest is right and proper, but intestate inheritance is wrong and un- 
just. 

Bentham proposed that, if there are no direct heirs, intestate property 
should go to the State. 

DUTIES OF PARENTS AND CLAIMS OF CHILDREN. 

Parents owe to society to make children good and valuable 
members of it. Children ought to be provided with education 



mill's principles of political economy. 21 

and other appliances sufficient to give them a fair chance of ob- 
taining success by their own exertions. Every child has this 
claim, but has no claim to anything more. p. 172. 

Land as such cannot justly be property. But: — p. 66. 

If the land owed its productive power wholly to nature, and none to in- 
dustry, it would be unjust to let it be engrossed by individuals. But most 
of the valuable qualities of land are the product of industry. The fruits of 
this industry cannot be reaped in a short period. Nobody will incur labor 
and expense unless he will be benefited. Time must be given to enjoy 
the improvements, and perpetual tenure is the best way to secure this. 
P- 173- 

OWING TO THESE REASONS, PROPERTY IN LAND IS JUSTIFIED 
WHILE THE OWNER IMPROVES IT. 

But property in land is not sacred, and is unjust if not expedient. 
The products of labor should be absolute property. 
Land should be property only when it produces positive good. 
No quantity of moveables prevents others getting more, but the holder 
of land keeps others from its enjoyment, p. 174. 

A man has a right to the profits from land, but he must manage 
it consistently with the public good. p. 175. 



CHAPTER II. 

WAGES. 

The effects of competition are usually exaggerated, and those of custom 
slighted, but there are two 

Agencies affecting Wages. 

1. Competition, disturbed by 

2. Custom. 

These modify each other and produce varied results. 

Competition has only recently become the governing principle, p. 176. 

Competition never regulates rents or professional charges. 
Prices are regulated by competition, strongly in wholesale, slightly 
in retail trades, p. 177. 

causes of the general rates of wages. 

Wages depend on, 

I. Demand =: Capital (that part only of circulating capital 
which constitutes the wages fund.) 



22 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



3. Supply =z Population (those who work for hire). 

The wages fund = the wages of productive and unproductive 
laborers. Productive wages are the larger part, so the term is 
employed for these. 

T/ie Simple Statement of Wages Fund Theory. 

Under the rule of competition, wages cannot be affected hy anj'thing 
except the relative amount of capital and population. 

/. e. Wages rise and fall as the wages fund increases or diminishes. 
This is not assented to without changes. Even Mill abandoned it. p. 179. 

CATRNES' TRUE WAGES FUND THEORY. 











FIXED 
CAPITAL 

C 


RAW 
MATERIAL 

D 


WAGES 
FUND 

E 


B 









1. The total wealth of a country (A) is the limit of its capital 
(B). 

The size of B depends on the effective desire of accumulation. 

The wages fund can evidently never be larger than B. 

B contracts and expands independently of labor bargains, p. iSo. 

2. Each industry determines for itself what proportion of the 
whole capital must go to C, D and E. 

This proportion changes only with advances in machinery or intelligence. 

3. Minor changes take place in these limits but do not affect 
the question. 



OBJECTIONS TO CAIRNE S WAGES FUND THEORY. 

I. Wages are high when trade is good. 

When there is a brisk demand for a commodity, more labor is needed, 
and wages rise. 

Answer. This is not inconsistent with the theory. 

All capital is occasionally idle, then it is the same to the laborer as if it 
did not exist. A brisk demand employs idle capital. 

When capital is unemployed, wages fall. 

These are temporary fluctations. p. 1S4. 



mill's principles of political economy. 23 

2. High prices make high wages. 

Because the capitalists make greater profits and therefore can pay their 
laborers more. 

Answer. This can only happen if the capitalists, receiving more, save 
more, and thus increase their capital ; otherwise, wages will be higher in 
the trade with a brisk demand, and lower in the rest. This cannot last 
long, for the superfluous capital will overflow into the other trades and 
restore the balance, p. 184. 

Distinguish carefully between 

Real wages, the quantity of commodities which a laborer 
■obtains in return for his exertions, p. 185. '*' 

Money wages, the mere amount of money that a laborer 
receives, irrespective of its exchange value. 

Resume. When profits increase with higher prices, more 
capital will be invested in that one trade, thus there will be a 
dsmaud for labor, and money wages will rise in that industry. 

When we consider the relation between prices and real wages, the ques- 
tion differs. 

General high prices would not change real wages. But if prices are 
higher in one trade, the laborers in that will get higher real wages. 

3. Money wages vary with the price of food. 

Answer. This is only partially true, and does not affect the depen- 
dence of wages on capital and happens in accordance with its laws. 

Dear or cheap food caused by variety of seasons does not aftect wages, 
rexcept that in times of scarcity people are eager for employment and 
lower the market against themselves, p. 186. 

Biit^ 'previously kjio-wn permanejtt dearfiess or cheapness of food 7iiay 
^affect -wages-i for: — 

1. If the laborers have only enough to support themselves and the 
(Ordinary number of children, if food grows dearer and wages do not 

increase, more children will die. Wages will increase because laborers 
are fewer than if food had remained cheap. 

2. Even if wages were high enough to allow food to become dearer 
without depriving laborers and their families of necessaries, they might 
not wish to forego comforts, and so would limit births. 

A rise in the price of food may operate thus: — 

1. Wages may increase by prudential check. 

2. Wages maybe unchanged, but the standard of living may be lowered, 
and the injury may become, permanent 

The latter case is more frequent, and nullifies the self reparation of 
calamities to the laboring classes, p. 187. 

Converse. 

When food cheapens, wages will not fall immediately, they may even 

rise ; but they will fall at last so that the laborer will be no better off than 

before, unless the indispensable standard of living has been raised. This 

is seldom the case, and marriages increase in seasons of.cheap food. p. 188. 



24 mill's principles of political economy. 

The condition of the laborer can be bettered only by additions 
to capital or by a diminished birth rate. p. 1S9. 

Population can increase with impunity only when capital 
also increases immensely. 

Usually either 

a. The arts are stationary, and capital increases slowly. 

b. Owing to a low effective desire of accumulation, the increase of 
capital is soon limited. 

c. If neither of these occurs, the increase of capital is limited by defi- 
ciency of land. 

If capital and population double simultaneously, produce cannot: — 
therefore, 

Either wages fall, or profits fall and the increase of capital is slackened. 

Only in very exceptional circumstances can population increase rapidly 
without lowering wages, p. 190. 

Resume. 

POPULATION IS RESTRAINED EITHER BY 

1. Prudence of individuals or States. 

2. Disease or starvation. 

3. Customs of living. 



CHAPTER HI. 

REMEDIES FOR LOW WAGES. 

VARIOUS MEANS OF KEEPING UP WAGES TO DESIRABLE POINT. 

1. Fix amount of wages by law. p. 193. 

This is the simplest way, and the one usually proposed. It is not 
intended nowadays to fix wages absolutely, but to fix a minimum and let 
the excess be adjusted by competition. 

2. Fix wages by boards of arbitration. 

These are composed of delegates from labor and capital, to adjust 
wages, not according to the state of the labor market, but according to 
natural equity. 

3. Limitation of hours of work, leaving the rate of wages 
untouched by law. p. 194. 

This means the same wages for less work, thus increasing cost of 
production, and would also injure laborers who work by the piece. 

4. Fix wages by public opinion of what is fair to both parties. 
(Philanthropists.) 

5. Allowance system zzz minimum of wages fixed. 



mill's principles of political economy. 2^ 

Objections, p. 195. 

Wages cannot be kept above the rate made by competition, i. e. above 
the highest rate which capitalists can afford (for capitalists compete to- 
gether as well as laborers). Competition i-aises wages as well as decreases 
them, and wages can be lowered only to the point where all laborers 
share in the wages fund, otherwise capital would be idle and wages would 
rise. But competition is not free; some laborers will be kept out of em- 
ployment. 

They must be employed and capital must be increased by compulsory 
saving, i. e.. work should be found for all. p. 197. 

This is all right if the claim could be confined to one genei-ation, for 
society has the right, in i-eturn for the protection it affords, to tax for the 
public good those who possess superfluities. The greatest need is the 
subsistence of the people. No one is responsible for his birth, and those 
who have more than enough should provide for those who have not 
enough. But it is not fair to those who have produced and abstained to be 
required to provide for all those whom the imprudent may procreate, 
p. 196. 

If this were just or allowed, all checks would end, taxation for the poor 
would engross the whole income of a country, payers and receivers would 
be melted into one mass. 

If the State provides sufficient wages for all, it has the right 
to limit increase. The neglect of this principle gives bad results. 

See poor laws, p. 197. 

Self help should be cultivated, for the allowance system produces bad 
results, p. 198. 

If wages are increased by allowances, the people will populate up to 
this allowance, and be as badly oft' as before, or even worse, p. 199. 

People with a low standard of living produce a similar effect on people 
with a higher standard, p. 200. 

THE REAL REMEDY FOR LOW WAGES IS LIMITATION OF 
POPULATION. 

This is understood by trades unions in regard to their own trades, but 
is not generally applied because; p. 201. 

1. The matter is better comprehended in a small field. 

2. Artisans are more intelligent than laborers. 

3. Artisans are most provident because they have more to preserve, 
p. 202. 

To alter the habits of laborers, all must be educated. 
But education is incompatible with extreme poverty, so ; 
Poverty must be annihilated for one generation ; this can be 
done ; — 

I. By national colonization. 
The money for this would come from unemployed capital. 



26 mill's principles of political economy. 

2. By creation of small proprietors, p. 202. 

Public land should be divided into small holdings, necessary tools, etc. , 
supplied to responsible laborers, and interest for the advance laid as a 
perpetual quit rent. p. 204. 

Either alternative must be carried out on a large scale so as to raise the 
general standard of living. 



CHAPTER IV. 

DIFFERENCES OF WAGES IN DIFFERENT EM- 
PLOYMENTS. 

ADAM smith's IDEAS. 

1. Wages decrease with ease, cleanliness, and honorableness, 
in various trades. 

But really disagreeable employments, instead of being better paid, are 
worse paid than others because those who have no choice do the work. 
If the supply of labor were greater than the demand, then people would 
require additional compensation to induce them to do unpleasant work. 

2. Wages are higher when employment is inconstant, p. 206. 
Usually employment is continuous, but in trades where it is not, the 

laborer must earn enough to support him when he is necessarily idle; 
he must also be compensated for the risk and consequent anxiety of 
getting no employment. The combination of these two causes makes very 
high wages, p. 207. 

3. If the chance of total failure is great, possible rewards 
must be higher, p. 208. 

I, 2, and 3 would be true if competition were free. 
The following are caused by natural monopolies. 

4. Wages increase with the trust necessarily imposed in the 
laborers. 

This is caused by absence of competition, for but few laborers are trust- 
worthy. 

5. Wages are higher when the trade needs previous educa^ 
tion, and are proportionate to its cost. 

Wages must repay with a profit the expense incurred in education. 

There is a natural monopoly in favor of skilled laborers, exec- 
utive managers, etc. 

The fact that instruction is required puts the trades beyond the masses 
and creates a natural monopoly. See notes p. 13. 



mill's principles of political economy. 27 

CairJies' theory of 7ion-comfieting groufts. p. 2IO. 

A series of layers exist among laborers -which are separated by various 
causes, the members of each layer compete with each other, but the strata 
are practically isolated. Now, however, increased facilities for education 
are breaking down the barriers between strata. This, besides many excel- 
lent effects, unfortunately tends to diminish the wages of skilled labor. 

LAWS CANNOT EFFECTUALLY REGULATE WAGES. 

When a trade is carried on by persons who are mainly sup- 
ported by some other trade, which alone cannot support them, 
the wages of the former trade may be extremely low; e.g., do- 
mestic manufactures. In these, the wages depend on whether 
the supply can fill the demand, p. 211. 

If it cannot, some laborers must devote themselves entirely to this kind 
of production, and the price of the article must be high enough to give the 
laborers ordinary wages, and, therefore, to give the domestic manufac- 
turers handsome rewards, p. 212. 

But if the supply is too great, the price is kept down to the lowest point 
where it will pay to produce it. 

Supplementary Resources Diminish Wages. 

When the laborer is assisted by domestic manufactures, or outside aid, 
the wages of the main occupation decrease. 

When a laborer's family assists him, his wages are lowered. The col- 
lective earnings will often be less than his alone, because of overpopula- 
tion. When a man's family does not assist him, hiswages must be enough 
to support him, his wife, and enough children to keep the population up, 
for if they were less, the population would not be kept up. p. 212. 

COMPARATIVE WAGES OF MEN AND WOMEN. 

When men and women are equally efficient, custom is the only 
thing that makes their wages unequal. But, in the employments 
peculiar to women, an overcrowded state lowers wages. Skilled 
labor enjoys a monopoly as usual. 

Overcrowding reduces wages of women lower than those of men. 
Women get the amount necessary to sustain one human being, men always 
get more. p. 214. 

Fees of professional persons are fixed by custom, p. 215. 



28 Mill's principles of political economy. 



CHAPTER V. 



PROFITS. 



After repaying the capitalist for his outla\' in wages, materials, tools, 
etc., a surplus remains which is his profit. This he can spend or save, 
p. 216. 

Wages of labor are the reward of labor. 
Profits of capital are the reward of absthience. 
Gross profits consist of 

1. Only a part of the gross profit is the return for the use of 
the capital itself, viz., What a solvent person would pay for the 
loan of it = Interest, p. 217. 

2. Compensation for risk, which raises the rate of interest. 

3. Wages of superintendence ; i. e., reward for assiduity and 
skill. These are not really part of profits, but are wages of 
skilled labor. 

The lowest rate of profits that can exist is that which is barely 
adequate to compensate for the abstinence, risk, and exertion 
employed, p. 218. 

From the gross profits, enough must be taken to cover losses. 

Remuneration for capital is steady. 

Remuneration for risk is very variable. 

Remuneration for superintendence is very variable. 

After allowance is made for risk and monopolies, the rate of 
profit on all capital tends to an equality, p. 220. 

Gross profits vary with individuals, p. 221. 

Various trades hold out equal expectations of profit, after making 
necessary compensations. 

If this were not so, more persons would enter the more thriv- 
ing business. 

If a trade is not considered thriving, and its profits are inferior to those 
of others, capital leaves it, or new capital is not attracted. By this change 
in distribution, a sort of balance is kept. p. 222. 

This equalizing process, /'.c, the transfer of capital from one trade to 
another, does not often call for a real transfer of capital, but is made by 
the distribution of new accumulations. Even when capital is really trans- 
ferred, those in unprofitable trades do not give up business, but only limit 
that part of it which is carried on with borrowed capital, while the most 
profitable trades increase that part of theirs. 



mill's principles oP political economy. 2<^ 

When a business is altogether declining, and the capital must be extri- 
cated, much loss is incurred, therefore this is done only as a last resort. 
This is owing to machinery and other fixed capital, business connections, 
and experience, p. 223. 

CAU^E OF PROFIT. 

Labor produces more than is needed for its support, thus a 
surplus is left ivliich is frofit. p. 224. 

Profit comes from the productive power of labor, not from the 
incident of exchange. 

The capitalist is assumed to make all advances and to receive all the 
produce, p. 225. 

The Rate of Profit is the ratio which the excess of pro- 
duct over advances bears to the advances. 

ALL advances ARE WAGES OF LABOR, 

for materials and implements are produced by labor. 
Rent is left out of the question, p. 226 

Therefore profits depend on the cost of labor and nothing 

ELSE CAN AFFECT THEM. p. 227. 

Wages are distinct from cost of labor. 

It is commonly said that wages are high, when it is meant that the cost 
of labor to the capitalist is high. 

The cost of labor is fi'equently at its highest when wages are 
lowest, for labor, though cheap, may be inefficient. 

Although inefficiency is usually accompanied by low wages, laborers 
with high wages usually give an equivalent. 

Another thing which makes wages no real criterion of the cost 
of labor is the varying costliness of articles consumed by the 
laborer, p. 228. 

If these are cheap, real wages may be high, and yet the cost of labor 
may be low. 

If dear, i-eal wages will be low, the cost of labor high. 

COST OF LABOR DEPENDS ON, 

1. The efficiency of labor. 

Under this head comes the question of fertility and natural advantages, 
and the whole matter of ease and difficulty of production. 

2. The real wages of the laborer. 

3. The greater or less cost of the articles composing these real 
wages, p. 230. 



30 mill's principles of political economy. 

Profits will rise if: — 

1. Labor becomes more efficient, and there is no increase in 
wages. 

2. Real wages fall, the cost of the components being unchanged. 

3. Necessaries become cheaper, while the laborer obtains no 
more of them. 

This involves a fall in money wages. 

Profits will fall if:— 

The converse of i, 2, 3 happens. 

No other circumstances can aflect profits. 



CHAPTER VI. 

RENT. 

Since labor, capital, and natural agents are needed for pro- 
duction, the man who has a natural agent has a claim to a part 
of the product. Land is the principal natural agent which can 
be appropriated, and what is paid for its use is called Rent. 

Landed men are the principal class who have a right to a share in the 
product through their ownership of something which is not the product 
of labor. 

Rent is the effect of a monopoly. 

The reason why landlords exact rent is, because many want land, but 
can obtain it only from them. 

Cairnes says that agricultural rent is not caused by a monopoly of the 
soil, but by its diminishing productiveness. 

Rent depends on law of diminishing returns, p. 223. 

A thing which is monopolized, when the gift of Nature and not the re- 
sult of labor, commands a price onlj' when supply is less than the demand 

If the whole of a country were needed for cultivation, all the land might 
yield rent. p. 133. 

No land pays rent unless it belongs to those superior kinds of 
which the supply is less than the demand. Alw:iys some non- 
rent-paying land. 

LOWEST CLASSES OF CULTIVABLE LAND. 

I. The worst land which can be cultivated for subsistence \% 
that which will just replace the seed and food of the necessary 
laborers, and also the food of the secondaries. 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



31 



Secondaries = laborers needed to supply agriculturalists with tools, etc. 
Nothing is left for profits, so the land can only be cultivated by the labor- 
ers themselves, or at a loss. 

3. The worst land which can be cultivated as an investment 
is that which, after replacing the seed and food of laborers and 
secondaries, and giving them the current rate of wages, leaves a 
surplus which equals what the capital could have obtained in 
other employments. 

Whether any land can do more than this is not a physical question, but 
depends partly on the value of agricultural produce. The greater the ex- 
cess of produce over advances, the poorer are the cultivable soils which 
can afford ordinary profits. 

It is evident that there will always be some land of class 3. 
This cannot pay rent until prices rise. p. 335. 

The produce of this land is needed by the country, otherwise prices 
would not have risen high enough to render its cultivation profitable. 

The Margin of Cultivation is the standard afforded by the 
land which gives only the ordinai'y profits (Class 3) for esti- 
mating the amount of rent which superior lands should pay. 

The rent which any land will pay is the excess of its profits 
over the profits which would be returned to capital used on the 
worst land in cultivation. 

The cbmpetition of capital allows landlords to appropriate this, since 
otherwise some capital would receive more than ordinary profits, p. 236. 

Some land always paj^s no rent. 

Objection. No landlord would allow his land to be used without pay- 
ment. 

Answer. Inferior land is interspersed with better. Rent is paid for the 
whole nominally, but it is calculated only on those parts which return 
more than ordinary profits. See p. 236. 

Suppose that soil of a certain low grade, whose cultivation would yield 
only ordinary profits, were withheld from cultivation. Increased produce 
would be obtained by the application of increased capital and labor on 
previously cultivated soils. 

The law of diminishing returns would cause the profit from this second 
application of capital and labor to just equal that which the withheld land 
would yield, p. 237. 

Even if it were true that there is never land which pays no 
rent, there is always some agricultural capital which pays no 
rent. 

This is the portion last applied, or applied in the last favoi-able circum- 
stances. 



2 2 mill's principles of political economy. 

The same price which gave this last application ordinary 
profits enables all the rest to yield a surplus proportionate to its 
advantages. This is rent and is taken by the landlord. 

Laws of Rent. 

1. A farmer requires the ordinary rate of profit on his whole 
capital. 

2. All excess of profits he must pay to landlord and no more. 

3. There is always some agricultural capital which gives only 
ordinary profits, p. 240. 

Many payments are included in rent which do not belong there; e.ff., 
buildings are not land but capital, and reward for their use is interest 
not rent. 

Capital sunk in permanent improvements loses its character and be- 
comes land, it should yield rent. 

In whatever order lands come into cultivation, those which 
vield the least proportionate return will always regulate the price 
of agricultural produce, other lands will pay rent. 

Rent does not really form anv part of the expenses of agricul- 
tural production. For superior eflSciency makes up for higher 
price, in this as always. 



BOOK IIL 
EXCHANGE. 

CHAPTER I. 

VALUE. 

Value is concerned only with distribution of wealth, and not at all with 
production, and with the former only so far as competition, not custom, 
is the distributor, p. 249. 

The Use of a thing is its capacity to satisfy a desire, or to 
serve a purpose. No useless thing has a price. 

Teleologic Value, or value in use, is the extreme limit of value 
in exchange. 

Exchange value may be less than value in use, but it can never be 
greater; for persons will not give for a thing more than the utmost value 
it has for them in gratifying their inclinations. 

Value, without adjunct, means^value in exchange. 
Exchange value must be distinguished from price. 

The Price of a thing is its value in money, p. 350. 

Exchange Value is the general purchasing power. 

Command over commodities in general, or purchasing power, is mei-ely 
relative. 

Those changes which originate in several commodities compared with 
a particular one affect its value relative to them ; but those which originate 
in itself affect its value in regard to everything. 

A general rise of prices is possible. 

A general rise of values is impossible. 

For all things cannot rise relatively. Some must rise and others must 
necessarily fall. A general rise or fall of prices means an alteration in 
the value of money, and is unimportant, except as regards contracts, p. 
251. 

Competition is supposed to regulate evei'ything. 



34 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



Cairnes' idea of value is the ratio in which commodities ex- 
change in open market. See p. 351 for various ideas. 

Resum^ of Laws of Value under Free Competition. 
Exchange value has three conditions : 

1. Utility, or ability to satisfy a desire (U). 

2. Transferableness. 

3. Difficulty of attainment, which has three classes : 

CLASS I. 
Those limited in supply, e.g. ancient pictures or monopolized articles. 
Law I. Their value is regulated by demand and supply. U the only 
limit. 

CLASS 2. 

Those whose supply can be indefinitely increased by labor and capital. 

Law 2. Their normal and permanent value is regulated by cost of pro- 
production, their market value by demand and supply, which tends toward 
the normal value. 

CLASS 3. 

Those whose supply is governed by diminishing returns, and whose 
cost is continually increasing. 

Law 3. Their normal value is regulated by the cost of production of 
that part which is marketed at the greatest cost. Their market value is 
regulated by demand and supply as in Class 2. 

If competition is not free, then the value of Classes 2 and 3 is governed 
by the law of reciprocal demand. 

Difficulty of attainment varies. 

Class I (a) Sometimes an absolute limitation of supply. 

The value depends on scarcity and on the proportion between 
supply and effective demand, p. 255. 

Classes 2, 3 {b') Most things depend only on the labor and ex- 
pense of production, p. 254. 

General Demand = General Supply, therefore 

No general overproduction is possible. Particular overpro- 
duction is possible because a varying amount of the general pro- 
(y.iction is devoted to the purchase of given things. 

If demand and supply are unequal, tliey are equalized by 
competition. The price rises and falls until the market value is 
just that which will carry off the existing or expected supply. 

Few commodities are naturally limited in supply, any com- 
modity can be liinitcd by artiiicial monopoly, p. 357. 



mill's principles of political economy. 35 

The supply of some things is temporai-ily limited ; e.g., agricultural 
produce, and things which take a long time in manufacture. Until the 
supply is increased, the value rises with the demand. 

Things which can be easily multiplied, but can be diminished only by 
destruction, have their value regulated by supply and demand. This will 
rise as the stock, wears out until production is renewed. 

Labor depends on demand and supply, as it can easily be in- 
creased or diminished in amount. 

A minimum value is always extant which determines whether 
an article will be produced or not. Unless the market value will 
repay the cost of production and yield ordinary profit, the article 
will not be produced, p. 359. 

Necessary value = cost of production and ordinary profit. 

When competition is free, necessary value is all that can be 
expected. For if profit is greater, capital rushes in, the supply 
is increased, and values fall. p. 260. 

This does not imply that anybody gives up business, but it is all done by 
means of credit. That profits may be equal when the outlay is equal, 
things of the same cost of production must be of the same value. 

NATURAL VALUE, OR NATURAL PRICE, IS 

that value of a thing which is proportionate to cost of production, 
or the centre value toward which market value gravitates, which 
is preserved by the variations in supply, p. 361. 

There is no need of any actual alteration in supply. The mere possi- 
bility often suffices to lower prices. 

The values of things that can be increased at pleasure do not 
depend on demand and supply, p. 262. 

There is a demand for commodities at their natural value, and the supply 
tries to conform to the demand. When it does not conform, it is through 
miscalculation, or from a change in the problem, p. 263. 

Either the natural value changes, or the demand varies owing to an 
alteration in the consumer's tastes. 

If a value other than natural value be necessary to make demand equal 
supply, the value will change for a time only; for more or less than 
ordinary profit cannot exist. 

RESUME. 

Class i. Demand and supply govern all things which are 
limited ; except that even for these there is a minimum deter- 
mined by cost of production. 



36 



MILL S PRINCIPLES OF POXITICAL ECON6mY. 



Class 2. Demand and supply determine the changes of 
values, for short periods only, of things which are unlimited. 
They in turn are ruled by the gravitation of values toward cost 
of production, where all things would settle unless continually 
disturbed. 

Continued in Chaoter III. 



CHAPTER II. 

ULTIMATE ANALYSIS OF COST OF PRODUCTION. 

Mill's Ideas. 

The cost of production to the producer is the labor expended in pro- 
ducing an article, p. 264. 

The principal component in cost of production is laboi". 

Considering the capitalist as the producer, we may replace "Labor"' 
by "Wages." 

For tools, materials, etc., were pi-oduced by labor and capital, and 
their value depends on the cost of production = labor = wages. 

This shows that cost of labor = cost of production. 

The value of commodities depends principally on the quantity of labor 
required for production, and also its remuneration. 

Labor = wages to the capitalist. Wages may vary with the same 
ainount of labor. The values must depend on wages. 

The mutual relations of articles cannot be affected by causes which 
affect both alike, therefore — 

A rise or fall in general wages affects everything equally, and so does 
not alter values, but a general rise of prices is possible, p. 265. 

General high or low wages do not aflect values. 

High \tages do not make high prices, for if this were true, there would 
be no real rise in wages, because if wages could not rise without raising 
the price of everything, ther^ would be no rise at all. 

General high prices increase money returns and expenses alike, while 
high or low wages in industrial trades do affect values, p. 266. 

The produce of skilled labor is more valuable than that of unskilled, 
because the former is more highly paid. 

Owing to "noncompeting groups" wages in different employments do 
not rise and fall simultaneously, but are nearly independent. Such dis- 
parities increase the relative cost of production, and will affect values. 



'mill's principles of political economy. 37 

The relative wages necessary to production affect values as 
much as the relative quantities of labor, p. 267. 

Absolute wages and quantities have no effect. If thej varied simulta- 
neously in all trades there would be no effect. 

Capital is necessary to production as well as labor. The 
reward of abstinence (pi-ofit) must compensate for all abstinences, 
and all advances are part of the cost of production. 

Thus profits as well as wages determine cost of production, p. 26S. 

Formerly, on pages 225, 226, Mill did not include profits in outlay, now 
he includes profits both of direct and indirect capitalists. 

CORRECT IDEA OF THE COST OF PRODUCTION. 

The reason why wages are higher here than in England. 

In America three men with $100 of capital can produce 100 bushels of 
wheat on an acre. In England the same men can only produce 60 bushels 
to an acre with the same capital. Now if the rate of profit is 25 per cent 
in both countries, in one case there will be 75 bushels, in the other 45 
bushels, to be divided among the laborers. Thus each man's wages will 
be 25 bushels, in America, while the English laborer will only get 15 
bushels. This is seen from the following diagrams. 

25 bu. profit 15 profit 

100 bu. — 60 bu. — 

75 bu. wages 45 wages 

Wages and profits are high when cost of production is low. 
p. 369. 

Our extractive industries are very productive, therefore wages and profits 
are high {i.e. cost of production is low). 

Cost of production is not made up of wages and profits, and 
the cost does not rise with a rise in wages and profits. 

An increased cost of production means that more capital and labor are 
needed to produce a given article. 

"Moi-e labor" means that a given quantity of labor is exerted for a 
longer time. 

"More capital" means that a given amount of wealth is abstained from 
for a longer time, i.e. more sacrifice in eXftrtion and abstinence is needed. 

CAIRNES' DEFINITION. 

The cost of production is represented by the number of average 
laborers employed, multiplied by the time, regarding also the 
severity and risk of the work, plus the quantity of wealth ab- 
stained from multiplied by time, regarding also the risk. 

(Labor(l) (Time(t) of exertion or abstinence) (Risk (r)) -j- 
(Wealth(w)) (Time) (Risk). 



3S 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



(LiTeR + WaTeR) 
This includes the real sacrifice of laborer. 

Relations of Cost of Production to Values. 

In competing groups, the amount of wages and profits equals the sacri- 
fice, p. 270. 

Wages and profits both come from aggregate product, therefore thej 
must vary with it. If the totjll value falls, some laborers will be paid less 
than their sacrifice is worth. 

The value of a commodity in a group must conform to its cost 
of production. For; — 

a. If the value of an article did not give the laborer the usual 
equivalent for his sacrifice, he would change his work. p. 270. 

b. If profits were not of average amount, the capital would 
be otherwise invested. 

In non-competing groups it is difl'erent, as the value of the 
aggregate product in any part of a group depends on what it 
will exchange for in other groups. 

If cost of production is low in one group, and other groups have a 
strong demand for the product, its value will rise. 

Since labor and capital do not move freely between groups, 
wages and profits may not correspond with actual sacrifice, 
hence products do not exchange proportionately to their cost of 
production, and reciprocal demand is the law of their value, p. 
271. 

It is said in business that high and low wages aftect cost of production. 
Wages do represent cost to the capitalist, /. e. cost of labor. Thus "cost 
of production" is misused for "cost of labor." 

The connection between cost of labor and cost of production is through 
efficiency of labor. Thus the more productive an industry, the higher its 
wages and profits may be. 

If machinery can lessen the sacrifice to labor and capital in 
producing an article, higher wages are consistent with lower 
prices. Owing to skill and natural resources, some laborers can 
produce articles cheaper than others who may be paid much 
less. p. 272. 

FLUCTUATIONS OF THE MARKET. 

, Normal price is governed by cost of production and reciprocal 
demand, and must he constant, unless one of these alters. 



mill's principles of political economy. ^g 

The market price may vary from the normal price, as it 
depends on the opinions of the dealers in regard to the state of 
supply and demand ; these variations are fluctuations of the 
market, and call into action forces w^hich restore the normal 
price, p. 272. 

Value depends on relative profits as it does on relative wages, and the 
idea that high general profits can cause high values is absurd. 

Profits may enter more largely into the cost of production in 
one thing than in another, even though the rate of profits is the 
same, as one article may have to yield profit for more time than 
another; i. e. take longer to produce, p. 273. 

E. g. Wine which must be kept requii-es an additional outlay which 
must be compensated. 

Profits enter more into the cost of production of machine 
made articles than into that of those made by hand. They are 
like wine. For less wages are paid, and the difi'erence is paid 
as profits to the machine maker. 

As pi'ofits enter unequally into the advances of capitalists and 
therefoi'e into returns demanded, it follows ; — 

1. Commodities do not exchange in the ratio of the quantity of 
labor necessary for production, not even allowing for unequal 
wages of various kinds of labor. 

2. Every rise and fall of general profits will aflect values. 
Not by raising or lowering them (an impossibility) but by altering the 

proportion in which values are affected by unequal times. When two 
things requiring equal labor are of difterent values because of different 
times of production, this diff'erence will be greater when profits are greater 
and vice versa. Wine and cloth will be more unequal at 40 per cent 
profit than at 20 per cent. p. 274. 

Therefore a general rise of wages, when it involves increase in cost of 
labor, influences values, not by raising them universally, but by lowering 
profits, and thus diminishing the difference caused by time. All machine 
made articles are lowered in value when profits fall. p. 275. 



Constant 



Elements of Cost of Production. 

f a Wages. 
1 b Profits. 



r^ • ^ i (I Taxes. 

Occasional i / -17 . . r ■. 

( Extra cost trom scarcity. 



Some taxes are part of cost of production and the outlay must return 
ordinary profits, p. 276. 



A.O mill's principles of political economy. 

Taxation of certain articles only would raise their value. 
Extra cost from scarcity aftects natural agents. They have no value 
from appropriation, but from scarcity. 

GROUND RENT IS PART OF COST OF PRODUCTION. 

These "Occasionals" increase cost of production because there 
is either more abstinence, or abstinence for a longer time ; 
thus they aflect values. 



CHAPTER III. 

RENT, IN ITS RELATIONS TO VALUE. 

Class 3. Things w^hich have several costs of production, 
and are governed by the lavv^ of diminishing returns ; e. g. 
agricultural produce, p. 377. 

This class is intermediate between classes i and 2. 

If only the best land in the country is used, the price of corn 
will change only with casual variations in supj^ly. p. 37S. 

As the population increases, the demand is doubled ; it will not pay to 
cultivate poorer lands, or increase cultivation on good soils, owing to 
diminishing returns, unless the price rises; this will be brought about by 
increasing demand, and until the price is sufficient to pay for an additional 
quantity, the value of the supplj^ is a scarcity value. When the price rises 
to the natural price of the required quantity, it will be produced, p. 279. 

THE LAW OF VALUE FOR CLASS 3. 

The natural value of an article is determined by the cost of 
that part of it which is produced and marketed at the greatest 
expense. 

Those who cultivate most Hivorable soils obtain for their produce more 
than the cost of production, the difference between efficiency of their own 
and poorer soils. This is a privilege and must be paid for unless the 
farmer owns the soil. 

The surplus produced by a part of agricultural capital ov»^'- 
what is produced by the same amount on poorer soils, or I 
higher cultivation, must be paid as rent. p. 280. 

Adam Smith says that the produce of land is always at a monopo 
value, because in addition to ordinary profit it always yields rent. p. 26 

Objection. There can be no monopoly value when the supply can 
indefinitely increased if we t\re willing to pay more. 



mill's principles of political economy. 4 I 

Rent is no part of the cost of production of agricultural pro- 
ducts. The least favorable land, or capital, pays no rent and 
determines the value of the whole product ; rent is no cause of 
value, but the price of the privilege conferred on all but the 
value-fixer, and is repaid by increased efficiency. 

Rent equalizes the profits of different capitals. If rent were abolished, 
the consumer would not be benefited, but the farmers would, as, if a part 
of the products had a high price, the whole would, p. 282. 

Nationalization of land would not benefit the laborers by 
lowering the price of food. 

Mines pay rent. 

Even the poorest may pay rent, as the grades are sharply defined, and 
the demand may raise the price above the cost of production of the poorest 
mine, without being high enough to make still poorer mines pay. In the 
interval, the produce is at a scarcity value, p. 283. 

Fisheries pay rent. 

Owing to the same causes as mines. 

When a new mine or fishery is opened better than the poorest in use, 
the scale will be disturbed, and a new i-egulator will come into use. 

Ground rent, and rent for gardens, must equal or surpass the 
agricultural rent. 

Beautiful sites are at a scarcity value. Convenient sites are on a par 
with fertile soil. 

The ground rent must be higher than its own agricultural 
rent, not than that of better land. p. 284. 

Wliarfage, docks, patents, all are similar. Superior business talents 
are similar, as the man can produce cheaper than the value fixer and thus 
pays himself rent. 



CHAPTER IV. 



MONEY. 



Money performs three services. 

I. A common measui^e, or denominator, of value. 

A common measure for values of difterent kinds is very necessary. In 
barter calculations would have to be made on difterent data at every trans- 
action, there could be no current price, p. 2S7. 



42 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



A common denominator is a standard to which the values of other 
commodities may be reduced for comparison. See p. 121. 

2. A medium of exchange. 

A medium of exchange transfers value. Division of labor impossible 
under a barter system. 

3. A standard of value for deferred payments. 

This is the means of comparing the purchasing power of an article at 
various times. This is distinguished from i only by the element of time. 
At the same time and place the standard of value is given in the common 
denominator of value. 

A measure of value is a thing by comparison with which we may find 
the value of any other thing. Value is relative and two things are neces- 
sary to make it besides the measure. 

A measure of value is a thing, by comparison with Avhich we may infer 
the relative values of two other things. 

Thus anything can serve as a measure of value, but money is usually 
used. 

A measure of the value of a thing at different times and places is sought, 
instead of at the same times and places. To make this possible, money 
must always have the same general purchasing power, which is impossible 
for any commodity in all circumstances. 

The only remedy is to have a 

MULTIPLE STANDARD. 

A definite quantity of a number of articles as grain, beef, 
potatoes, wool, sugar, timber, iron, coal, etc., is taken. Their 
value, in the quantities and qualities specified, is ascertained at 
certain intervals b}' government and the total amount of money 
needed to purchase the lot is announced. People may make 
future payment contracts in this standard. 

It is used as follows; — A borrows $1000 for 10 years. The multiple 
standard is then $125. Thus he borrows S standard units. When he 
pays, the multiple standard is $100. 8 units = $Soo. Thus neither man 
gains or loses. The same genei-al purchasing power is transferred in 
either case. 

THE REQUISITES FOR A PERFECT ISIONEY. 

1. Value. 5. Divisibility. 

2. Portability. 6. Stability of value. 

3. Indestructibility. 7. . Cognizability. 

4. Homogeneity. 

These requisites limit the list to a few articles. Gold and silver pos- 
sess these qualities in the highest degree. 



mill's principles of political economy. 43 

There has been only one great alteration in the value of gold; /. e. from 
American discoveries. The cost of production varies less than that of 
any other article, p. 291. 

Because of the durability of gold and silver, the total quantity in exis- 
tence is always so great, relative to the annual supply, that very little 
effect is produced by a change in cost of production, p. 292. 

By the process of coining, the metal is divided into convenient portions, 
with recognized proportions. Thus frequent weighing and assaying 
is saved. 

The use of money makes no difference in values, as things are 
not really purchased with it. Only the income of miners is 
derived from money. The real income of a person is his share 
in the goods produced. Money is merely a machine, and pro- 
duces bad effects when it gets out of order, p. 293. 

As money is a commodity belonging in class 3, its value is 
determined temporarily by demand and supply, permanently by 
cost of production. 



CHAPTER V. 

THE VALUE OF MONEY, AS DEPENDENT ON 
DEMAND AND SUPPLY. 

The value of money is its purchasing power, and is inversely 
as general prices. 

When a person lends or pays money, what he transfers is not mere 
money, but the right to a certain value of produce to be selected at pleas- 
ure. Capital is really lent, but it is computed in money. Hence capital 
is often called money. 

The value of money depends on demand and supply. 
The supply of an article is the amount offered for sale. We really buy 
and sell money. » 

The supply of money is all the money in circulation. 

The demand for money is all goods offered for sale. p. 296. 

The whole of goods = the demand for money, and 

The whole of money = the demand for goods; thus they are recipro- 
cally supply and demand. 

If the consumption of a community remains stationary and the monej^ 
is doubled, demand of money for goods would increase, and thus conse- 
quently a rise of prices. This increased value would not benefit any one. 

Prices would rise in a certain ratio proportionate to the increase in 
money, while the value of money would fall in the same ratio, p. 297. 



44 mill's principles of political economy. 

The value of money varies inversely as its quantity. 

This is peculiar to money. It is not true of commodities that a dimi- 
nution of supply raises the value proportionately. The proportion varies 
owing to variations in demand. The amount which would be spent, being 
limited, will be affected by the difficulty of attainment. The onlj' limit to 
the demand for money is the absence of any more goods to offer in 
exchange. 

Money laid out = value of goods purchased, but the quantity of money 
laid out does not equal the quantity in circulation. 

Each piece of money is used many times and must be counted for as 
many pieces as the number of times it changes hands. 

The quantity of goods on hand is a fixed quantitj'. The number of 
times resold is also a fixed quantity. 

The value of money depends on its quantity and the number of times 
it changes hands. 

The amount of goods and transactions being the same, the 
value of money is inversely to quantity times rapidity of circula- 
tion. 

The quantity of money in circulation equals the money value 
of sold goods divided by the rapidity of circulation. 

V r= value of money. 

Q_= quantity in circulation. V =: 

R = rapidity of circulation. ^ 

The rapidity of circulation does not mean the number of purchases in a 
given time. Time is not to be considered. 

If a piece of money makes few purchases in a year because traffic is dull, 
or because of barter, this is no reason for low prices or high money value. 
How often it changes hands to perform a given amount of traffic is the 
essential point. 

Credit renders connection between prices and quantity of 
money less intimate, p. 299. 

Only that part of money affects prices wliich is actually ex- 
changed for goods. 

Money frequently enters a country, is invested, and leaves, having acted 
only on the market for securities, and not on the market for commodities. 
A foreigner invests his money and thus lowers interest, thus causing native 
capital to go abroad for investment, p. 301. 

The passage of money depends on tlie state of the loan mar- 
ket, not on the state of prices. 

When a temporary increase of l)usiiiess is accompanied by a 
proportionate increase of money, prices are not raised. 



mill's principles of political economy. 45 



CHAPTER VI. 

VALUE OF MONEY, AS DEPENDENT ON COST OF 
PRODUCTION. 

The ultimate regulator of its value is cost of production. 

Governments formerly stopped the exportation and melting of money, 
and also t.he importation of other articles, in order to encourage the expor- 
tation of other things. They drew into the country more money which 
they thought equalled wealth, this caused high prices, which they thought 
an advantage, but it is not really. 

When no charge is made for coinage, the value of money 
equals that of bullion. 

It cannot be worth more as bullion than as coin, for as it can be easily 
melted, the quantity in circulation would be lessened uutil its value 
equalled the same weight of bullion. Coin would be worth more than 
bullion, because it is manufactured, but as no charge is made for coinage 
the value is unchanged. 

If government charges a seigniorage for coining, coin will be 
to that extent moi^e valuable than bullion, p. 303. 

The value of money conforms to the value of its metal, with 
or without the addition of the cost of coinage. 

Money is usually a foreign product, and this modifies conclu- 
sions, p. 304. 

When money is a native product, it belongs to Class J ^ and is 
governed by law 3. 

If gold is above its cost value, money will be high and prices low. Low 
prices cause lower expenses of production, returns are also low, thus only 
the gold producer will be benefited, p. 305. 

Adjustment is slow. 

Because money is durable and the supply is therefore immense. A 
small annual production makes up for the loss by wear and the use in the 
arts. If the increase were stopped, it would take long to diminish the 
present supply perceptibly. 

The quantity can be increased more rapidly than decreased, but the 
increase must be great to produce noticeable effects, hence the effects of 
all changes in conditions of production are for a long time merely ques- 
tions of quantity, and depend but slightly on cost of production, p. 308. 

The durability of precious metals has excepted them from the 
law of cost of production. This is the cause of vast accumula- 
tion and also prevents its value from conforming to cost of 
annual product, p. 309. 



46 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



But the value of money conforms, though slowly, to cost of 
production. 

Objection to law of value for money. Although money is governed 
by ordinary laws, a special law is made for it. 

Answer. The law for money is simply the law of demand and supply 
controlled, but not annihilated, by cost of production, since the latter 
would have no effect on value if it could have none on supply, p. 309. 

There really is a closer connection between quantity and value of money 
than in the case of other things. With other articles the potential altera- 
tion is sufficient and actual alterations are temporary, except as the 
demand is affected and the supply altered as a consequence, not a cause, 
of alterations of value. This is true of gold and silver in the arts, but not 
of money, p. 310. 

Alterations of cost of productions of metals do not aftect value 
of money, except in proportion as they alter the quantity, this is 
not true of other commodities. 

Sometimes the potential change produces the usual effects, 
and money conforms more to law^ of supply and demand. 

The cost of production regulates the quantity finally, and 
there will always be money enough to perform all necessary 
exchanges, consistently with keeping up the value to the cost of 
production, p. 311. 

The average prices will be such that money will exchange for its own 
cost in other goods. Because the quantity always affects value, the quan- 
tity will be always kept at the amount necessary for doing, at those prices, 
all required business. 



CHAPTER VII. 

OF A DOUBLE STANDARD AND SUBSIDIARY 

COINS. 

Gold and silver, though the least variable of all commodities, are 
not invariable in value, and do not always varj' equallj'. When a gold 
coin is more valuable than a silver one, it will be melted, and silver will 
be the only money, p. 313. 

This is expressed by 

GRESHAM S LAW. 

Money of less value drives out money of more value when 
both are letral tender. 



mill's principles of political economy. zj.y 

When both metals are legal tender at a fixed valuation, the standard is 
subject to derangement from the fluctuations of either, p. 314. 

When one metal is legal tender and the other is coined and allowed to 
pass at its market value, the best results are secured. When gold is used 
thus, three regulations are necessary to keep the other metal in circulation. 

P- 315- 

1. Silver must be made legal tender for small paj'ments. 

2. Silver must be rated above its gold value, so that it may not become 
more valuable than gold by a slight rise, and thus be driven out. 

3. The quantity of silver coinage must be limited, so that its over- 
valuation may not be a source of profit to individuals. 

For the experience of the United States, see p. 319-324, 
Legal coins in the U. S. in 1884. 

1. Gold coins. 

2. Silver dollars of 4x2.^ grains. 

3. United States notes. 

4. Subsidiary silver, to the amount of $10.00. 

5. Minor coins, to the amount of $.25. 



CHAPTER VIII. 

CREDIT AS A SUBSTITUTE FOR MONEY. 

Credit is only permission to use another person's capital, and 
it cannot increase the means of production, but only transfers 
them. p. 325. 

The same sum cannot supply its entire value in wages and materials 
to two sets of laborers at once, but though capital only to the boi'rower, 
it still is a part of the lender's wealth. 

Credit causes a more effective use of capital, and by preventing 
loss by disuse, adds not to the capital in existence, but to that in 
employment, p. 326. 

Credit given to unproductive consumers is always' a detriment to the 
wealth of a country, p. 327. 

Where credit is given, general prices depend more on the 
state of credit than upon the quantity of money, as, though not 
capital, it is purchasing power, and by creating a demand for 
goods affects their price as much as rnoney would. 

There are four kinds of credit. 

I. Simple book credits, p. 328. 

A keeps an account of what B owes him, and B does the same with A. 
At the end of the year the two accounts are compared, and a small pay- 
ment balances them. 



48 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



2. Bills of exchange. 

A pays his debt to B by making over to him a debt due A by another 
person, C, by means of a transferable order on C which, when accented 
or signed by C, is a certificate of indebtedness. 

Bills of exchanges were first introduced to save transportation of the 
precious metals. 

A of New York sends B goods worth $ioo. C of Liverpoool sends D 
other goods also worth $ioo. Thus A has a claim to $ioo in Liverpool 
while D owes the same sum there. D gives A $ioo, who is thus paid, and 
takes his claim on B. This claim is sent to C who presents it to B for 
payment. Thus all are paid without the use of money, p. 329. 

For form used see p. 329. 

Bills of exchange are often drawn paj'able in six months instead of at 
sight. In that case, the bill is taken to a bank and discounted, /. e. the 
owner gets the cash minus the interest for the specified time. Of a number 
of bills of exchange, only one can represent real property, p. 330. 

3. Promissory notes, p. 331. 

A promissory note is ?i promise to pay money, while a bill of exchange 
is an order to pay money. A Boston man sells $1000 worth of shoes to a 
man in St. Louis, who pays for them by a promise to pay $1000 in a 
given time. This is usually taken to a bank and discounted. If payable 
in six months at 6 per cent a year, the Boston man gets $970. Such notes 
act as money, and render the same amount of coin unnecessary, but the 
issuer m.ust keep enough money on hand to pay them when due. p. 332. 

4. Checks. 

A has $100 in coin. He takes it to a bank and is credited for it. He 
then buys $50 worth of goods of B, and gives him a check for $50. B 
takes the check to his bank and it is placed to his credit. Thus no money 
is used. Such a transaction is possible only when both use the same 
banker, otherwise B would take the check to A's bank and get cash. 

The clearing house is an arrangement to make all the banks of a city 
practically one establishment, p. 333. 

A clearing-house is a circular railing with as many openings 
as there are banks. A clerk from each bank leaves at the bank's 
opening all tlie checks which have been deposited in his bank, 
and notes the amount. These checks are claims on other banks 
for money. A clerk inside takes the checks, and distributes 
them to the clerks of the banks against whom they are drawn. 
The checks that are left at a bank's opening are the claims of 
other banks against it. The sum of these claims is set off 
against the sum noted by the clerk at first, which constituted its 
claims on other banks. The dilTcrence for, or against, the bank 
is then settled by a check, p. 334. 



mill's principles of political economy. ^.Q 



CHAPTER IX. 

INFLUENCE OF CREDIT ON PRICES. 

When there is an increase in the amountof money in circulation, prices 
rise, when there is a diminution, prices fall; and credit produces this 
effect equally with coin. Bank-notes, bills of exchange, and checks have 
no independent action on prices. Money not in ciixulation has no effect 
on prices, p. 336. 

A man's possible demand for 'commodities is composed of all 
the money in his possession or due to him (this is transferred 
by check) and of all his credit besides, in the various forms of 
book credits, or borrowed bank notes, p. 337- 

More or less of this purchasing power is used, as the prospect of profit 
seems greater or less. The use of this power tends to produce the very 
effect which caused its employment, i. e. a rise of prices. This rise in 
price gives a hope of further profit, and more credit is employed with the 
same effects. When these speculative prices have risen above the rise 
which the original grounds for expecting a rise will justify, the rise stops. 
Then everybody is anxious to sell to realize his gains, and so rushes into 
the market. This great supply thrown into the market causes a sudden 
drop in prices, and the consequent losses often wipe out the previous 
gains. This drop, when joined with an unreasonable panic causing 
almost a complete refusal of credit, is a commercial crisis and is caused 
solely by credit, and not by money or the failure of the crops, p. 339. 

Book credits serve only for a single purchase, but checks, bank notes, 
bills of exchange, and promissory notes, being transferable, perform all 
the functions of a currency. 

The willingness to give credit depends, not on the quantity 
of currency, but on the supposed solvency of the debtor, p. 343. 

An inconvertible legal tender paper is money, but instru- 
ments whose value depends on the solvency of the issuer are not 
money, but credit. 



CHAPTER X. 

AN INCONVERTIBLE PAPER CURRENCY. 

When it was found that pieces of paper, by bearing upon them a pro- 
fession that they were equal to a certain sum of money, gave to the issuer 
all the benefits of possessing coin, governments began to use them, and, 
in addition, freed themselves from the necessity of giving coin in exchange 
for the paper, the onlj' thing which gave the paper any real value, p. 345. 



50 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



An inconvertible paper derives its purchasing power solely 
from convention. 

A man will accept anything as money when he is sure that others will 
take it from him on the same terms upon which he received it. 

The value of an inconvertible paper depends solely on sup- 
ply and demand, and not at all on the cost of production. 

If there is more in circulation than is needed to perform the exchanges, 
it will depreciate, p. 346. 

EFFECTS OF PAPER CURRENCY. 

Suppose the currency of a country is $1,000,000 of gold coin. Now let 
a paper currency be issued by the government to the amount of one-half 
the coin, /. e. $500,000. The prices of all commodities will rise one-half, 
and gold with the rest. An ounce of gold will be worth more as plate than 
as coin, and so will be melted. This melting will go on until an amount 
of coin has been withdrawn equal to the paper issue. Then prices will 
return to their former level, and the currency of the country will be $500,- 
000 of paper, and $500,000 of coin. Successive issues will produce the 
same effects, until finally all the coin will be driven out of the countrj'. 

P- 347- 

Up to this point, the same effects follow from an inconvertible or a con- 
vertible paper. Now, if still another issue is made, prices rise as before, 
and coin is in demand for melting. Although there is no coin in circula- 
tion, if the paper is convertible, coin may be obtained from the issuers in 
exchange for notes, and all this extra issue will be presented for pay- 
ment; thus the supply will be proportioned to the demand and cannot 
depreciate. But if the currency is inconvertible, there is no such check, 
and unlimited depreciation follows, p. 348. 

Such a depreciating power is an intolerable evil, as it deranges business. 
An income of $100 in paper may be worth only $50 in a year. 

It was in order to avoid just such variations that gold and silver were 
taken as the standard of value. Such depreciation can be prevented with 
an inconvertible paper by contracting the issues whenever the market 
value of bullion is above the mint price; this is practically equal to a con- 
vertible paper, but is much more liable to abuse by over-issue, p. 352. 

FALLACIES OF AN INCONVKUTIHLE PAPER CURRENCY. 

I. Paper cannot be issued in excess as long as it I'epresents 

property. 

This theory confounds two distinct evils of a paper currency. («) The 
insolvency of the issuer, which would render valueless the promise to pay. 
(A) The tendency to depreciation by over-issue as in the case of the 
French assignats. 



mill's principles of political economy. ^ I 

It is evident that if the propertj' represented cannot be claimed in 
exchange for the paper, it differs in no waj from an inconvertible paper, 
as there is no check by redemption to over-issue, p. 349. 

3. An increase of the currency quickens industry by causing 
a rise in prices. 

If the rise of prices increases a man's income, it also increases his ex- 
penses, and'thus produces no effect. In times of speculative high prices, 
men gain, not because they expect tlie present prices to last, but because 
they expect them to fall. Whoever realizes then, will have more dollars 
after the fall, without their being of less value, p. 360. 

When commodities rise unequally, some gain while others lose. Thus 
there is no real gain. 

An issue of notes is a gain to the issuer, as, until the notes are returned 
for payment, he obtains the use of them as if they were real capital. 
When the paper merely supersedes coin, this gain is a loss to nobody, as 
it merely saves the expense of the more costly material. But if notes are 
added to a paper circulation, the gain to the issuer is paid by the depre- 
ciation of the currency, a tax is virtually levied on the public for his bene- 
fit, p. 362. 

The debtor classes are also gainers, as, by paying their debts in a depre- 
preciated currency, they can escape from part of their obligations. 
Although this seems a great gain to the laborers, who are the principal 
borrowers, the loss of integrity and good faith is much greater than any 
apparent advantage, p. 363. 

MONEY MEASURES AND TRANSFERS VALUE. 

1. The precious metals make the best money on account of their pecu- 

liar qualities. 

2. Its value depends in the long run, on the cost of production at the 

worst mine in use (Class III) ; but practically on demand and supply 
(Class I). If no credit exists, its value changes exactly with the 

supply, or V = 

^^ ^ qxR. 

3. Under two legal standards, it obeys Gresham's law. 

4. The substitutes for money are called credit. This is not capital, but 

calls inactive capital into use. The use of credit does not depend on 
the quantity of coin and notes. The various kinds are : 

1. Book credits. 

2. Bills of exchange. 

3. Checks. 

4. Promissory notes of 

1. Individuals. 

^ Tj„ 1 f «• Coin. 

2. Banks ^ , t j 

I. o- JLand. 

3. Governments, wKich are 

1. Convertible, e. g. U. S. notes since 1879. 

2. Inconvertible, e. ^. U. S. notes from 1862-1879. 



C 2 Mill's principles of political economy. 



CHAPTER XI. 

OF EXCESS OF SUPPLY. 

THE DOCTRINE OF GENERAL OVERPRODUCTION OF WEALTH. 

1. There is sometimes an excess of productions in general 
beyond the demand for tliem. 

2. When this happens, purchasers cannot be found at prices 
which will repay the cost of production with a profit. 

3. Consequently, there is a general depression of prices or 
values (no clear discrimination between them). 

4. The cause of this is the too rapid accumulation of capital, 
which must be kept down by an ample unproductive consump- 
tion, p. 366. 

mill's answers. 

Demand me!i.n& either the desire to possess, or the means of purchase. 

a. If the community does not lack the desire to possess, it must lack 
the means of purchase. But this is impossible, as all commodities are the 
means of payment for all other commodities, through the medium of 
money. If we double the supply of commodities in a country, we double 
the purchasing power. Everybody will be able to buy twice as much, as he 
will have then twice as much wealth as before. Thus general values 
remain unaffected, while prices depend mei-elj on the quantity' of currency. 
(In the case oi particular commodities, the relative v^\\.\?^% might change, 
as the community might prefer to more than double its consumption of 
one commodity, and only increase slightly its demand for some other 
commodity. The total demand for the two, however, would be doubled.) 

b. If the desire to possess is supposed to be lacking — i.e. that all who 
have an equivalent to give already possess all the consumable articles they 
wish — the fact that production continues proves that this cannot be the 
case, as no one will work if he already has everything he wishes. 

If a foreigner should come into a country where everybody had every- 
thing he wanted, and should produce something of which there was 
already enough, there would be overproduction of this particular article. 
But this overproduction was not the result of a lack of desire to possess, 
as the foreigner certainly wanted something, but produced the wrong 
thing. If he could produce something new and desirable, the inluibitants 
would exert themselves to purchase the new article, p. 36S. 

Whoever brings additional 'commodities to market, brings 
additional purchasing power ; also an additional desire to con- 



mill's principles of politic;al economy. K^ 

sume, since otherwise he would not have produced these articles. 
Thus neither of the elements of demand can be wanting, when 
there is an additional supply, although the demand may be for 
other things than the proffered supply, p. 369. 

In time of commercial crises there is an undersupply of 
money, caused by the annihilation of the credit which formerly 
served as money, and not by an excess of production. This con- 
dition is only temporary, p. 370. 

The notion of overproduction seems to be supported by the continual 
fall of interest and profits. This is caused hy the operation of the law of 
diminishing returns, which is brought into action hy the increase in pop- 
ulation. Low profits are very different from a deficiency of demand 
caused by overproduction. This subject is treated Book IV, Chap. II. 



CHAPTER XII. 

OF SOME PECULIAR CASES OF VALUE. 

Demand and supply always govern the tnarket value of com- 
modities, and also the permanent value of all things whose 
supply is not governed by free competition ; but under free com- 
petition things (except Class i) exchange in the ratio of their 
costs of production, p- 373- 

WHEN TWO COMMODITIES HAVE A JOINT COST OF PRODUCTION. 

I.e. When they are produced by the same operation, and the outlay, 
although made for the sake of both, would be the same if one of the two 
were not desired. 

Cost of production determines the sum of their prices, and the 
price of each one depends on demand and supply. 

GAS AND COKE. 

A certain quantity of gas and the residuum of coke are sold so 
that the price of the two just pays expenses and gives ordinary 
profits. If more gas is wanted, more coke will be produced. 
Suppose that there is no demand for this extra coke, it will be 
offered at a lower price. But this lower price together with the 
former price of gas will not pay expenses and profits, and the 
price of gas must be raised. The demand will naturall}^ contract, 
and prices will become fixed when, — by the rise of gas and fall 



54 



mill's principles of political economy. 



of coke, — so much less gas, and so much more coke is sold that 
all the coke is taken at a price which, together with the price of 
gas, will give the usual profit, p. 374. 

The reverse. If more coke is wanted than is produced consequent on 
the existing demand for gas, its price will rise, as the demand is greater 
than the supply. Production of coke will be stimulated, and the resultant 
gas can only be disposed of hy lowering the price. Equilibrium will be 
reached when the demand for gas fits the demand for coke so that the 
quantity wanted of each is just that produced in making the other. 

AGRICUI.TURAL PRODUCE. 

There would be nothing peculiar in this case if it were not for the fact 
that most soils, although fitter for one article than another, are not abso- 
lutely unfit for any, and that rotation of crops is necessary. If one soil 
were fitter for wheat, that alone would be grown there, while oats, for 
instance, would be grown on another soil ; thus the values would have no 
reference to each other as they are in noncompeting groups. If the 
demand causes both to be produced in competition on soils not especially 
adapted to either, their relative costs of production on these soils will 
determine their relative values. If the demand for wheat causes all the 
medium soil to be occupied, the value of wheat must be greater, and that 
of oats less than their relative values as determined by their costs of pro- 
duction on that medium land. p. 376. 



CHAPTER XIII. 

OF INTERNATIONAL TRADE. 

The reason whj' things are imported which could be produced without 
difficulty at home, is that it is cheaper to import than to produce them. 
When two things are produced in the same place, one is cheaper than the 
other because it is produced with less labor and capital. This does not 
apply in the case of distant places, and a thing is often sold cheapest by 
being produced elsewhere than where it can be produced with the least 
capital and labor. This cannot happen in adjacent places, as, if one place 
had an advantage over another, production would be transferred to the 
best place, as thus profits would be increased. This would be the case even 
between distant places, if capital and labor moved freely, but this is not 
the case. The great difierences in wages and profits in difierent parts of 
the world do not cause the expected movement of labor and capital on 
account of distance and dilference in forms of ci\ilization. p. 379. 



mill's principles of political economy. ^^ 

Trade is determined, not by absolute cost of production, but 
by tlie difference of comparative cost, and we may often by trade 
obtain articles at a less expense of labor and capital than it cost 
the foreigner to produce them. p. 3S0. 

Illustration. 

Cloth ID days labor produces 20 yds. in England. 

15 " '.' " 20 yds. in Sweden. 

Iron 12 " " " 25 cwt. in England. 

15 " " " 25 cwt. in Sweden. 

Here England has the advantage in both cloth and iron, yet trade will 
arise. England will send her 20 yards of cloth and get 25 cwt. of iron in 
exchange (for 25 cwt. of iron exchange for 20 yds in Sweden, as both take 
15 days labor to produce), and so gain 2 days' laboi-. Thus England got 
for ten days' labor what it cost Sweden 15 days to produce. This is be- 
cause it is the difference in comparative costs that causes trade, p. 381. 

CASES IN WHICH TRADE WILL OR WILL NOT ARISE. 
Case I. 

Corn 100 days' labor produces 75 bush, in United States. 

150 " " " 75 bush, in England. 

Iron 100 " " " 50 cwt. in United States. 

150 " " " 50 cwt. in England. 

In this case although the United States has the advantage in 
both articles, no trade will arise, as the comparative costs are 
the same, while the absolute costs are different. 

If England sent 50 cwt. of iron to the United States she would only get 
75 bushels in exchange, which could be produced at home with the same 
number of days' labor, besides saving the cost of carriage. It would be 
the. same if the United States sent 75 bushels to England. Neither side 
would be benefited by any exchange. 

Case 2. 

Corn ICO days' labor produces 75 bush, in United States. 

200 " *•' " 75 bush, in England. 

Iron 100 " " " 50 cwt. in United States. 

150 " " " 50 cwt. in England. 

Trade would arise. England's gain would be a saving to the 
world, as the United States loses nothing, p. 382. 

England would send her 50 cwt. and would get 75 bushels in exchange, 
which would have cost her 200 days. She would thus save fifty days less 
the cost of transportation over and back. 



56 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



Case 3. 

Corn 100 days' labor produces 75 bush, in United States. 

200 " " " 75 bush, in England. 

Iron 125 " " " 50 cwt. in United States. 

150 " " " 50 cwt. in England. 

Both countries would gain b}' trade, p. 3S3. 

50 cwt. sent by England would exchange for more than 75 bushels, since 
it would take only 100 days to produce the corn, while it would take 125 
days to produce 50 cwt. Let us say for 84 bushels. It would take 112 days 
to pi-oduce 84 bushels in the United States (84 -7- y'lnr) 1 thus we save 13 
days by buying our iron instead of producing it. It would have taken 
England 224 days to have produced the 84 bushels which she obtained 
witli 150 days' labor in iron, thus saving 74 days. Whether England Avill 
get more or less than 84 bushels for 50 cwt. depends on the strength of 
the relative demands of the United States and England for each other's 
products. England's comparative advantage is in iron, while ours is in 
corn, although we have an absolute advantage in both. Each country 
will devote itself to the article of its comparative advantage, and will 
import the other. 

Price is a measure of comparative cost. High prices show that 
gold is of less comparative value, and therefore cheaper to ex- 
port (like England's iron in Case 3). With low prices, the case 
is reversed, p. 3S4. 

Prices are determined by cost of production within the range 
of competition, out of that range (as in the case of foreign pro- 
ducts) by reciprocal demand. 

RULE FOR DETERMINING WHETHER TRADE WILL ARISE. 

If the ratios are the same (as 2 to 10 in one country, and i to 
5 in the other) no trade can happen ; but if they diller (as 3 to 
10 in one, and i to 8 or 1 to 3 in the other), trade will take place, 
and «// the possible combinations must be tried until the right 
one is found. 

Foreign trade enables nations to obtain articles which they could not 
produce, and also it causes the productive forces of the world to be more 
efficiently employed. If in case 3 the countries refused to trade, 87 days' 
labor would be thrown away. Although much labor and capital could be 
better employed in other countries, the true advantage of a country lies 
in producing for its own and foreign markets that article in which it lies 
under the least disadvantage, and importing everything else. p. 385. 

International trade is only an extension of the principle of di- 
vision of labor, and the gains arc the same in both cases. 



mill's principles of political economy. C^ 

THE ONLY REAL ADVANTAGE OF TRADE LIES IN THE IMPORTS, 
NOT IN THE EXPORTS. 

The idea that the advantage is in the exports is a relic of the "Mercan- 
tile Theory" which said that money was the only wealth ; thus exchanging 
goods for money, or exporting, was the only way to prosper, while ex- 
changing money for goods, or importing, was sure to impoverish a coun- 
try, p. 386. 

Really, a country produces an exportable article because it is the cheap- 
est way to obtain other things; not because it is under the necessity of 
producing the export, because if there is no demand for it the product will 
be wasted, or if not produced, the corresponding capital will remain idle. 
If the exportation were prevented, production of it would cease, and im- 
ports would necessarily fall off to the same extent, as the country would 
have nothing to offer in exchange. The capital employed in producing 
the export would now be occupied in producing the articles formerly im- 
ported. As the cost of production would be greater (87 days lost in case 3) 
the value and price of the former imported articles would rise, and the 
loss would fall on the consumers of the articles, p. 388. 

INDIRECT BENEFITS OF FOREIGN TRADE. 

1. Large production of an article tends to improve the pro- 
cesses of manufacture. 

2. Labor is stimulated to increased eftbrt to obtain new com- 
modities brought within reach by trade. 

3. Civilization is advanced by contact with other peoples. 

4. Good will is promoted between different nations, and war 
is prevented by the magnitude of commercial interests, p. 389. 



CHAPTER XIV. 

OF INTERNATIONAL VALUES. 

The value in any country of a foreign commodity depends, 
not on its cost of production where it is made, but on the value 
of the home produce which must be given in exchange, p. 391. 
If the United States imports wine from Spain, and gives a bale of cloth 
in exchange for every cask, the cost of the wine depends on the cost of 
production of the cloth in the United States, not on that of the winfe in 
Spain. If the wine costs 10 days' labor, and the cloth 20 days, the cost of 
the wine in the United States will be 20 days plus the cost of carriage and 



t8 mill's principles of political economy^ 

the importer's profit. If both articles are made in the same country, 
they will exchange in the ratios of their costs of production, but, as they 
are made in different countries, they are in noncompeting groups, and 
this law does not apply. See p. 27. 

Exchange value is the quantity of one article that will be given 
for a certain quantity of another article. This is governed by 
supply and demand, p. 393. 

A has spades, and B oats to dispose of. Whether A will give two spades 
for one bushels of oats, or whether B will give two bushels of oats for one 
spade depends on the intensity of A's demand for oats, or of B's for spades. 
If A's demand is slight and B's is strong, B will have to offer more oats to 
get a spade, and the exchange value of oats will be less. p. 394. 

Demand and supply cannot carry the exchange value in either 
country beyond the limit set by their costs of production. 

In case 3, p. 56. The most intense desire of England for corn cannot 
raise the value so that she will offer 200 days labor in iron for 75 bushels, 
as she could produce it just as cheaply herself. 

The question, who pays the cost of carriage, depends, like the 
question, who gains the most, on demand and supply. 

Cost of carriage is a kind of natural protection. There are 
many articles whose relative costs of production differ so little 
in different countries that the whole saving by importing is more 
than counterbalanced by the cost of carriage, p. 396. 

THE OPERATION OF THE LAW OF RECIPROCAL DEMAND. 

Broadcloth 10 days' labor produces 10 yds. in England. 

20 " " " 10 yds. in Germany. 

Linen 10 " " " 15 yds. in England. 

20 " " " 20 yds. in Germany. 

In England 10 yards of cloth exchange for 15 of linen. 

In Germany 10 " " " " " 20 " " 

It would be England's interest to import linen, and Germany's to import 
cloth. 

After importation begins, 10 yards, of cloth will exchange for the same 
number of yards of linen in both countries; if for 15 yards of linen, 
England will be as before and Germany will gain; if for 20 yards, Eng- 
land alone will gain; if for some number between, (as 17) both countries 
will gain. 

The demand for an article varies with the price, p. 397. 

Case I. The relative demands are equally intense. 

When ID j-ards of cloth equal 17 of linen, there is a demand in Germany 
for a particular number of yards of cloth, say 1000 times 10 yards, and in 
England for a particular number, say 1000 times 17 yards. Thus the 
demand on each side just equals the supply. 



mill's principles of political economy. 59 

Case 2. England's demand is less than Germany's. 

Suppose England desires only 800 times 17 yards of linen, while 
Germany desires 1000 times 10 yards of cloth. Thus Germany could 
only get 800 times 10 yards at the price of 10 for 17. To get the extra 200, 
she would have to offer more linen, say 18 yards. At this price England 
would demand 900 times 18 yards, while the rise in value of cloth would 
decrease the demand of Germany to 900 times 10 yards. Then the 
demand would again equal the supply, p. 398. 

Case 3. England's demand is greater than Germany's. 

At 10 for 17, England desires 1200 times 17 yards of linen while 
Germany desires 1000 times 10 yards. England would offer more cloth, 
say II yards for 17 of linen. Then England's demand would fall off to 
1 100 times 17 yards, and Germany's increase to iioo times 11 yards. 

Demand will again equal the supply. 

A coimtry gets its imports cheaper, (a) the greater the foreign 
demand for its exports ; (d) the smaller its own demand for 
foreign products, p. 399. 

THE LAW OF THE EQUATION OF INTERNA- 
TIONAL DEMAND. 

The produce of a country exchanges for the produce of other 
countries at such values as are required in order that the whole 
of her exports may exactly pay for the whole of her imports. ■ p. 
400. 

This law is merely an extension of the law of supply and demand. 

The cost of a country's imports consists of two variables. 

1 . The QUANTITY of her own products that she gives for the 
imports, p. 402. 

This depends on the intensity of the foreign demand compared with her 
own demand for foreign products. 

2. The COST in sacrifice and abstinence to her of the products 
given in exchange. 

This depends on natural advantages and the efficiency of domestic 
labor. 

Thus there are two senses in which a country can get articles 
cheaper by trade. 

I. In the sense of exchange value. These imported articles 
fall in value relatively to others. 

The same quantity of these articles exchanges for a smaller quantity of 
other articles. That is, the price falls, as less money is given for the same 
quantity. 



6o 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



2. In the sense of cost of production. The country gets the 
same quantity of the imported article with a less expenditure of 
labor and capital. 

This depends on 3 above. In case 3, p. 56, England gets her corn cheaper 
by 74 days' labor through trade. 



CHAPTER XV. 

OF MONEY, CONSIDERED AS AN IMPORTED 
COMMODITY. 

Money is usually an imported article, and is consequently 
governed by the law of international values, p. 404. 
Money enters a country in two ways. 

1. It is imported as bullion like other merchandise. 

2. It is imported as a medium of exchange to pay debts due 
the country. 

This last is peculiar to money and renders special exposition necessar3\ 
When the precious metals are imported as articles of commerce, they 
conform to the same laws as other foreign products, and are usually a 
regular article of export from the mining countries. The quantity of 
produce which a country, as England, will give for a certain quantity of 
bullion depends on the intensity of her demand for bullion compared with 
the strength of the demand of the mining country for England's products. 
The total of England's imports, including bullion, must just balance her 
exports. The demand for money increases with the cheapness in a 
regular way. p. 406. 

The cost of bullion depends, — 

1. On the quantity of goods given in exchange. 

2. The expense of transporting the goods over and the bullion 
back. 

Both these depend on the distance from the mines, and the former is 
much influenced by the bulkiness of the goods. Both countries bear a 
part of the cost of carriage, the exact amount being determined by the 
adjustment of international values. 

Prices are highest, i. e. bullion is cheapest, in countries whose 
exportable products are : 

(i) Most in demand abroad. 

(2) Which contain the greatest value in the smallest bulk. 

(3) Which are nearest to the mines. 

(4) Which have the least demand for foreign products. 



mill's principles op political ecokomy. 6 I 

(If we speak of "cheapness" in the sense, not of exchange value, but of 
cost in labor and abstinence (see p. 37) we must add 5, which does not, 
however, affect the value of money in commodities, but affects the facility 
with which all things can be obtained.) 

(5) Whose productive industry is the most efficient, p. 407. 

Therefore the value of money, in countries wliich import it, 
does not depend either on its value in the mining countries, or 
on the cost of production ; but depends solely on the equation 
of international demand. 

THINGS WHICH CHEAPEN THE IMPORTS OF A COUNTRY {including 

bullion^ . 

1. The opening of a new branch of export. 

2. An increase in the foreign demand for her exports, either naturally, 
or by the abrogation of duties. , 

3. A check to the demand for imported articles, either on account of 
import duties, or export duties laid by other countries. 

Any of these would cause imports no longer to equal exports, and 
foreign countries would have to offer their products cheaper, in order to 
restore the balance by the consequent increased demand. 

The whole of the exports of a country equal the whole of her 
imports, not the exports and imports to and from any one coun- 

try- 

Thus a country which exported nothing to mining regions might obtain 
its bullion cheapest, by obtaining it indirectly, p. 409. 



CHAPTBR XVI. 

OF THE FOREIGN EXCHANGES. 

The exports and imports are not exchanged directly, but are separately 
paid for by money, which, however, is seldom transported, as bills of ex- 
change are used. When imports equal exports, all transactions can be 
settled by bills of exchange; but if there is a difference, money must 
be sent to balance. Money is not sent directly, but remittances are 
still made by bills of exchange. This is done through brokers who buy 
and sell the various bills. Now if there is a greater demand for foreign, 
bills than for domestic, the brokers will chai-ge a premium, p. 412. 

A premium is an extra charge on bills of exchange sufficient 
to cover the freight and insurance on the coin, and also pay the 
broker a profit. 



62 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



The brokers charge less than it would cost to send the nionej directly^ 
and although only a few would really have to send coin, all would have to 
pay the premium on account of each other's competition. 

The reverse happens when the exports of a country exceed her imports. 
There is an excess of foreign bills which are consequently at a discount. 
The competition among brokers causes the benefit of this to be given to 
those who buy foreign bills. 

"The Exchange" means the power which the money of a 
country has of purchasing the money of other countries. 

Exchange is at par when exports equal imports. 

The same number of bills of each kind would be offered in both coun- 
tries, and hence would just balance, p. 413. 

Exchange is against a country when imports exceed exports. 
Bills on foreign countries are then at a premium. 

If the United States had a larger sum to pay to England than to receive, 
there would be more persons wanting bills payable in England, than 
there were persons wishing to sell English bills. A bill on England for 
$1,000 would sell for more than $1,000. Thus $1,000 of American money 
are worth less than their real value of English money. Those who have 
to pay money in England lose the premium, and those who have money 
to receive there gain the premium by selling their bills here. 

Exchange is favoi-able to a country when exports exceed im- 
ports. Bills on foreign countries are at a discount. 

If a balance is due the United States from England. $1,000 of English 
money will sell for less than $1,000 of American money. This is exactly 
the reverse of the above. 

When the United States has more to pay than to receive, England has 
more to receive than to pay, therefore when bills on England are at a 
premium here, bills on the United States are at a discount in England. 

The shipping point is reached when the premium or discount 
exceeds the cost of sending coin. 

In this case it will be cheaper for a man actually to send gold than to 
pay the premium or discount. 

The premium seldom reaches the shipping point, as the credit generally 
given allows payment to be deferred until the balance is restored by the 
self adjustment of exchange. Bills are at a premium because the imports 
exceed the exports. The premium is an extra gain to the exporter, as he 
can sell the English bill of $1,000 sent him for say $1010. Thus he will 
be encouraged to export. The Englishman will be less inclined to export 
as a bill of $1,000 due here will be worth only $990 to him. Thus all 
small variations are corrected. It is evident that if the increased exports 
equal the diminished imports there can be no premium or discount, p. 
416. 



mill's principles of political economy. 63 

Disturbances of the equilibrium of imports and exports are of 
two classes. 

1. Small accidental disturbances which correct themselves as 
above without shipping bullion. 

2. Disturbances arising from the state of prices, which can- 
not be corrected except by a subtraction of money or credit from 
the circulation of one country. 

ARBITRATION OF EXCHANGE. 

Since only total exports equal total imports, the United States may owe 
a balance to England and have a balance due from Holland. There will 
then be no premium, as the United States will pay its debts to England 
with the bills due her from Holland. 



CHAPTER XVII. 

OF THE DISTRIBUTION OF THE PRECIOUS MET- 
ALS THROUGH THE COMMERCIAL WORLD. 

The trade between nations tends to the same equilibrium be- 
tween exports and imports whether money and bills are used or 
not, and the same means are uSed in both cases to restore the 
balance, p. 420. 

If the United States imports more than it exports, a balance will be 
due to some other country, saj' England. Under a barter sj'stem the ex- 
ports must be offered cheaper, so that by means of the increased 
demand the exports may equal the imports. When money is used, the 
United States takes the imports at the same price as before, and pays the 
balance in money. This payment in money will evidently have to be 
kept up until the exports are increased, or the imports reduced. This 
can be done only through prices. 

When the state of prices in the two countries is such that the 
United States i-equires more imports than it can pay for by its 
exports, it is a sign that the United States has an excess of coin 
in circulation. The balance can be restored only by contracting 
the currency. 

By the continued shipments of coin the currency in the United States is 
diminished and that of England increased. As prices depend directly on 
the quantity of money, they will fall in the United States, and the 



64 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



increased cheapness will cause England to import more. Owing to 
the rise of prices in England consequent on the enlarged currency, 
less will be imported into the United States. The outflow of coin to 
England will continue until, by diminishing the total imports and 
increasing the exports, the balance is restored. Thus under a money 
system, by means of a fall in prices, the United States oflfers her exports 
at a cheaper rate. 

WHO GAINS THE BENEFIT OF AN IMPROVEMENT IN THE PRO- 
DUCTION OF AN EXPORTABLE ARTICLE.? 

Such improvements are either (a) the creation of a new 
export, or (&) the cheapening of an old export, p. 422. 

a. (i) The price of the new export falls in the United States. A 
demand consequently arises for it in England, This disturbs the bal- 
ance of trade, and the exports of the United States exceed her imports, 
the balance is paid in money, and (2) prices rise in the United States. (3) 
These higher prices will lessen England's demand for all the exports of 
the United States, while, owing to the shipments of coin, the United 
States will have more money with which to buy foreign articles. If this 
increased purchasing power is used, there will be an increase of imports. 
The balance will be restored anyway, either by increasing imports, or by 
diminishing exports. 

Results of {a). 1. England will have to pay more for all 
other exports, but will get the new one cheaper, p. 424. 

The United States will get the new export cheaper than England, 
although the price is the same in both countries. Cheapness is measured 
not by money price, but by the price as compared with the income of the 
consumers. The incomes in the United States have been increased by 
the coin sent by England, where the incomes have been diminished in the 
same proportion. Thus England only gets part of the benefit from the 
cheapening of the new export. 

2. The United States gains the full benefit of tlie cheapening 
of the new export, and gets all imports cheaper o.wing to the 
fall of prices in England. 

b. An old export, say cotton cloth, is cheapened. Its price falls and 
the foreign demand increases, (i) If the foreigners spend as much 
money as before on cloth, the balance of trade will be undisturbed. 

Result of <^ (i). Foreigners will gain the full' advantage of 
the improvement, as they will get more cloth for the sarpe money. 

b (2). If the increased cheapness causes more money than before to be 
spent on cloth, the excess will have to be paid in money, prices in th^ 
United States will rise. 



mill's principles of political economy. 65 

Result of <5 (2). Both gain, but the United States will also 
ain by having her incomes raised, and will thus gain more than 
England by the improvement, as England's incomes are reduced. 
). 425. 

b (3). If, while the same amount of cloth is bought, less money is paid 
3r it, the balance will be against the United States which will export 
lonej; prices will fall. 

Result of (5 (3). The opposite of i^. 2. 

The use of money as a medium of exchange never alters the 
aivs on which the values of other thing's depend^ nor does it 
alter the law of its own vahie as merchandise. 

RESULTS OF NON-COMMERCIAL PAYMENTS LIKE TRIBUTE OR 
INTEREST ON SECURITIES. p. 427. 

When the remittances are made in commodities, no return is expected 
for these exports. Exports must exceed imports by the amount of the 
remittance. Iftradewasin equilibrium befoi-e these remittances began, 
imports must be lessened, or an increased demand must be created for its 
exports by offering them cheaper. 

Result. The debtor country besides losing what it pays, loses 
also by the less advantageous terms on which it exchanges its 
own for foreign articles, while the creditor gains in both ways. 

The use of money makes no difference. As trade is in equilibrium, the 
first remittance must be made in money. Prices are lowered in the debtor 
country, and raised in the creditor one. Exportation from the debtor 
country is stimulated and importation is checked. Thus on the score of 
trade a balance is due from the creditor to the debtor. When this balance 
equals the payment, equilibrium will be restored, and the above results 
will follow. 

THE LAW OF THE EQUATION OF INTERNATIONAL DEMAND. 

Equilibrium is reached when a country is able by means of her 
exports to discharge all her foreign liabilities, p. 429. 



CHAPTER XVIII. 

THE INFLUENCE OF TflE CURRENCY ON THE 
EXCHANGES AND ON FOREIGN TRADE. 

The exchange value of gold and silver may vary owing to changes in 
thei^- cost of production, or on account of variation in the demand for 



66 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



them in the arts. Their value may increase owing to greater business 
transactions which cause a demand for more coin, or may diminish owing 
to the substitution of credit for coin. -p. 431. 

THE EFFECTS ON TRADE OF TEMPORARY VARIATIONS IN THE 
VALUE OF MONEY. 

If the coin currency of a country is suddenly increased, as by the discovery 
of concealed treasures, its value will fall and prices will rise. Then 
the exports will be diminished, and the imports stimulated. The conse- 
quent excess of imports will be paid for in coin, and the flow will continue 
from one country to another until the prices have risen equally in all 
countries. Thus all imports will equal exports although all will have an 
increased money price. The lessened value of bullion will diminish pro- 
duction at the mines, and this will continue until an amount equal to the 
treasure has been destroyed by wear. p. 432. 

The same results would follow if bank notes were added to the currency. 

Prices would rise, imports would exceed exports, and the surplus coin 
would be sent abroad. This would continue until prices were equally 
raised everywhere. 

Besides this, the coin is replaced by a cheaper money, and the difference 
is a clear gain to the issuers of the notes ; if the gain is used produc- 
tively, the country is as much benefited by this, as by any other capital. 

For this reason paper should always be substituted for coin, as far as is 
possible without endangering its convertibility, p. 434. 

When the paper exceeds in quantity the coin it replaces, prices will rise ; 
an article formerly worth $25 in coin will be worth $30 in paper. But 
this does not stimulate importation, as the foreigners reckon on a coin 
basis as before, p. 436. 

Thus a depreciation of the currency does not affect the foreign 
trade. 

The exchanges, however, are affected. $30 of United States paper is 
worth only $25 in England, so that a bill on England for $25 costs $30 in 
paper. When the real exchange is at par, there will be a nominal exchange 
against the paper country equal to the depreciation. When the exchanges 
are really against a country, the quoted exchanges are composed of (i) 
the real exchange, which depends on international trade; added to (2) the 
nominal exchange caused by depreciation. The amount of depreciation 
is measured by the difference between the market price of bullion and 
the mint price. 

The use of credit raises prices just like an increase of the currency'. Im- 
ports are stimulated by the rise, and the shipments of gold to pav the bal- 
ance contract the coin currency. Prices of course fall, and a panic follows 
which causes a commercial crisis, p. 439. 



mill's principles of political economy. 67 



CHAPTER XIX. 

OF THE RATE OF INTEREST. 

The gross profit of capital is divided into, 

1. Remuneration for risk, called insurance. 

2. Wages of Superintendence. 

3. Interest. See Book II, Chap. V. p. 28. 

The rate of interest depends on demand and supply. What is usually 
called interest is composed of insurance plus the real interest, p. 440. 

The demand for loans consists of the amount desired by those producers 
who can use borrowed capital profitably, plus the amount required for 
government loans. The supply consists of the capital of those who do 
not care to enter into production themselves, plus the sums collected by 
the banks. 

I. If this capital exceeds the desire for loans, lenders will offer it at a 
lower rate of interest. In this case either the borrowers will take more 
capital, and supply will again equal demand, or the lenders will take greater 
risks, and much of the excess of capital will be lost by unsuccessful enter- 
prises, while the low rate of interest will discourage the further increase 
of capital, p. 442. 

II. If this capital is less than the borrowers' demand, the rate of in- 
terest will rise, the demand will be checked, and many borrowers will re- 
tire from business and lend their own capital. The high rate will stimu- 
late the accumulation of capital. 

When capital is supplied by professional moneylenders, they must have 
compensation for risk; interest; and a further profit corresponding to 
wages of superintendence. The money lender lends his credit — the bor- 
rowed capital of others — for which he pays insurance and interest. A bank 
which lends its notes pays no interest on its borrowed capital. A bank ot 
deposit collects small sums and pays no interest. Thus banks, paying no 
interest themselves, can get the ordinary rate of profit on their capital by 
lending at lower rates, p. ^44. 

While the relation between total loanable capital and the demands of 
producers fixes the permanent rate of interest, the fluctuations depend 
on the supply in the hands of banks which, being lent for short times, is 
always in the market. The capital of non-producers is usually in some 
fixed investment like government bonds. 

In the beginning of speculation, money-lenders are more willing to lend, 
and interest is low. At the collapse of speculation, interest is high be_ 
cause, while many desire to borrow to keep themselves from failing, the 
money-lenders are afraid to lend. When a series of failures has created a 
general distrust, nobody will give credit, and a panic follows. Deposits 
are withdrawn from banks, and bankers raise their rates. When large 



68 mill's principles of political economy. 

government loans ai^e offered, the rate of interest rises, and the amount 
thus used is taken away from production. Other tempting investments, 
such as railways, tend to raise interest in the same way. p. 446. 

The rate of interest depends, not on the quantit}' of money in 
circulation, but on the relation between the amount of loanable 
capital and the demand for it. 

An increase of the currency by paper issues has no effect on 
the rate of interest. 

The price of land and other investments which give a fixed in- 
come depends on the rate of interest. When interest is low^, 
prices are high, and vice versa, p. 449. 

A lot of land giving a rent of $100 would sell for $1000 if the rate of in- 
terest was 10 per cent. If afterward the rate decreased to 5 per cent, the 
land would sell for $2000, since $100 is 5 per cent of $2000. 



CHAPTER XX. 

OF THE COMPETITION OF DIFFERENT COUN- 
TRIES IN THE SAME MARKET. 

The benefi,t of trade lies in the imports, and a countr}^ gains 
most when it can sell a few exports at a high price, and thus pay 
for its imports. Thus there is no benefit in "underselling," that 
is, selling exported articles at a lower price than another country 
can sell the same articles. 

One country (India) can only undersell another (the United States) 
in a given market, to the extent of expelling her, on two conditions ; 

1. India must have a greater comparative advantage in producing 
the given article. 

2. India's trade relations to the customer country must be such, in 
regard to reciprocal demand, that India gives her more than the whole 
advantage possessed by the United States, p. 451. 

Iron 10 days' labor produces 10 cwt. in England. 

10 " '• " 10 cwt. in United States. 

Corn 10 " " " 15 bush, in England. 

10 " " " 20 bush, in United States. 

England will send over 10 cwt. and, owing to the strength of interna- 
tional demand, will get say 17 bushels in return. Now the United States 
cannot be expelled from the English market by being undersold unless 
some other country offers England not only more than 17 bushels, but 
more than 20 bushels for 10 cwt., for instance, p. 451. 



mill's principles of political economy. 69 

Iron 10 days' labor produces 10 cwt. in India. 
Corn 10 " " " 25 bush, in India. 

India in this case could afford to give 21 bushels for 10 cwt. 

To undersell the United States, India must be able (i) to produce wheat 
at a less cost compared with iron, and besides (2) must have such a demand 
for English iron as to force her to give more than 20 bushels, even when 
the United States is driven out. If India's demand for iron were such as 
only to cause her to give 19 bushels for 10 cwt., the United States could 
still compete with India. In any case England would gain, as she would 
get more wheat for the same quantity of iron. 

Thus when India can sell corn cheaper than the United States (19 
bushels for 10 cwt. instead of 17 bushels) there is no danger of losing the 
market, but only of a less advantageous trade. Even if the United States 
is undersold, (21 bushels for 10 cwt.) the corn will not be exported, ex- 
ports will be diminished, gold will be sent abroad, prices will fall, and, as 
the expenses of the American producers are lessened, they will be able 
again to compete with their rivals. 

The loss by the fall of prices will fall, not on the expoi'ters, but on the 
consumers of imports, who with less incomes will have to pay the same, 
or higher prices, p. 452. 

Undei-selling, although a loss to the undersold countries, is a gain to 
the world, as less labor is expended in producing the article owing to 
some advantage possessed by the underseller. These advantages may be 
from better soil, better machinery, or more efficient labor. There' is no 
place in this theory for advantages of lower wages, which do not affect 
cost of production. 

The cost of labor is nearly the same everywhere ; w^hen a 
laborer leceives less vv^ages, he is found to do less work. p. 457* 

Thus Belgium cannot undersell England, although her workmen are 
paid less. In America, the cost of labor is so low that it gives both higher 
wages and profits. See p. 37. 

DOMESTIC MANUFACTURES. 

These are industries which are carried on in the intervals of other em- 
ployments by which the laborers are supported. Consequently, these 
domestic industries can be carried on with a much lower return than could 
possibly support a laborer who produced these articles exclusively, p. 460. 

The limit of cheapness in this case is not the necessit}' of living 
by the trade, but that of earning enough by the work to pay for 
this use of leisure time. 

General low wages do not cause low prices in a coimtry, nor 
do they enable her to undersell others. High wages do not make 
high prices. See Book II, Chap. 11, p. 21. 



70 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



Expenses which affect all industries alike have no effect on prices. If 
higher wages are paid in one industry, the price will rise, because other- 
wise the profits would fall below the average, and capital Avould leave the 
business. But if everybody has to pay higher wages, all profits are les- 
sened alike, and prices are unaffected. 

General low wages do not make low prices, but do make high 
profits, p. 461. 

If wages fell in one industry, the consequent greater profits would 
attract more capital, and the price would fall by the competition. If 
profits increase in all industries by a fall in wages, everything will remain 
unchanged. 

If wages rise, profits fall. 

If profits rise, wages fall, , 

Countries which have a low cost of labor and high profits do 
not for that reason undersell others, but they offer greater resis- 
tance to being undersold, as the producer can more easily submit 
to a reduction of profits, p. 462. 

Price in United States $60; profit, $15; cost of labor $45. 
" " England 55; " 5; " " " 50. 

As the cost of labor is lower in the United States ($45), she could 
undersell England ($50) if she had the same rate of profit (10 per cent) 
but she has higher profits (33 1-3 per cent) and so prices are higher. 

When profits were high, Venice had a monopoly of the carrying trade; 
as they fell, other countries with lower profits drove her out; and Holland, 
having the lowest rates of profit at home, finally drove all the others out, 
as she could afford to do it more cheaply, p. 463. 



CHAPTER XXI. 

OF DISTRIBUTION, AS AFFECTED BY EXCHANGE. 

The products of industry are divided into three shares, — 
wages, profits, and rents — and the use of exchange makes no 
difterence. . p. 465. 

Real wages are the commodities a laborer receives in return 
for his sacrifice. 

This is the only sense in which they are of importance to the laborer. 
They include food, clothing, shelter, etc. p. 466. 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



71 



Money wages are the quantity of money that he receives for 
his labor. 

In this sense only, wages are of importance to the employer. If the 
value of money and the efficiency of labor do not change, the money price 
is an exact measui-e of the cost of labor. 

Money wages are composed of, 

1. Real wages. 

2. The money price of the articles contained in the real wages. 

WAGES. 

Wages depend on the ratio between population and capital. 
Seep. 

In countries where the positive and preventive checks act, the money 
price of labor is just great enough to erfable the laborers to purchase the 
real wages necessary to cause the laborers to keep up the population. If 
money wages fall, population decreases, and wages rise. Thus monej' 
wages depend on the money price, and therefore on the cost of production 
of the articles contained in the real wages.* 

As the price of food depends on the productiveness of the poorest land 
in cultivation, so money wages depend on cost of production. 



As the margin of cultivation is determined only by the popu- 
lation, the ensuing rent cannot be affected by exchange. See p. 40. 

PROFITS. 

Since wages and rent are unaffected by exchange, profits are 
also unaffected, for the surplus, after paying wages and rent, is 
profits, p. 469. 

TWO WAYS IN WHICH THE COST OF LABOR MAY BE INCREASED. 

I. Real wages may rise, and consequently raise money wages. 

(If real wages rise by the fall in price of commodities, money wages 
will be unchanged, and profits will be unaffected.) If commodities are no 
cheaper, and the laborer gets more of them (owing to some change in the 
ratio of capital to population) the increase comes out of the profits of the 
capitalist. He cannot remedy this by raising his prices, for general high 
wages cannot affect prices. 

If a rise in wages caused a rise in prices, there would be no 
real rise, as the laborer would get no more real wages with his 
increased money wages, p. 470. 

A rise of getter al wages must fall on profits. 

* For cost of production see p. 37. 



72 



MILL S PRINCIPLES OF POLITICAL ECONOMY. 



2. Money wages may rise from an increase in cost of pro- 
duction caused by increased population. 

The extra quantity of food demanded would not be produced unless the 
price rose to compensate for the increased cost of production on account 
of "Diminishing Returns." The laborers' real wages being unchanged, 
his money wages must have risen to enable him to pay the increased 
prices. 

An increase of general wages lowers profits, and a decrease 
increases profits. 

But there is no real opposition of interest. Real wages are not cost of 
labor, and are highest when, owing to natural advantages or efficiency of 
labor, cost of labor to the employer is lowest, p. 471. 

The rate of profit and the .cost of labor vary inversely as one 
another, and are joint effects of the same causes. 



APPENDIX. 

PAPERS SET FOR EXAMINATION IN POLITICAL ECONOMY I. 

1883-1884. 

1. Explain carefully the following terms: production, consumption, 
effectual demand, margin of cultivation, cost of production, value of 
money, cost of labor, wealth, and abstinence. 

2. What conclusion as to the limit to the increase of production does 
Mr. Mill deduce from his investigation of the laws of the various requi- 
sites of production } 

3. Explain clearly how it is possible for the land of a country which is 
all of a uniform fertility to pay rent. 

4. Point out distinctly the connection between the money wages of 
laborers in the United States and the productiveness of the soil. 

5. Explain the operation of the laws of value by which the relative 
prices of wool and mutton would be regulated. 

6. Why is it necessary to make any different statement of the laws of 
value for foreign than for domestic products .-' What is the cause for the 
existence of any international trade? 

7. (i) What is the true theory of one country underselling another in 
a foreign market.? (2) What weight should be attributed to the fact of 
generally higher or lower wages in one of the competing countries.'' 

8. If capital continued to increase and population did not, explain the 
proposition that "the whole savings of each year would be exactly so much 
subtracted from the profits of the next and of every following year." 

9. Give the arguments for and against the income tax. Would the tax 
on any kinds of income not fall upon the persons from whom it was levied ? 
Explain. 

10. Define the term banking-reserve. What is the theory on which 
only a small part of the total resources is constantly kept as a reserve? 
What i-elation exists between the items of deposits, loans, and reserve? 

11. Explain the provisions of the Resumption Act, and show how the 
aiCtual results were produced. 

13. Was the issue of greenbacks in February, 1862, an actual necessity? 



APPENDIX. 



1SS5-1886. 

1. Explain what is meant bj the "standard of living" of the laboring 
class. In a densely populated country would the standard of living have 
any influence on the general rate of wages? 

2. Show clearly why there must be land in cultivation which pays no 
rent. 

3. Explain carefully the relation between Cost of Labor and Real 
Wages. How can an increase of population affect Cost of Labor? 

4. Under what conditions can it be said that normal value depends on 
the "expenses of production"? State the law of market and normal value 
for commodities affected by the law of diminishing returns, 

5. Explain the reason for the existence of foreign trade. Is there any 
different reason for the exchange of goods in domestic trade? 

6. What is inconvertible paper money? From the history of the 
United States notes state the main events -showing the attitude of Congress 
towards their issue, while the notes were inconvertible. 

7. Why is a bank obliged to limit its loans when its cash reserve is 
seriously impaired? 

8. Why is it that the products of extractive industries are liable to great 
variations of market value? 

9. Upon whom would a tax on Rent fall? Would such a tax be a dis- 
criminating tax on the agricultural interests? 

10. What are the advantages of direct taxation ? State by what kinds 
of taxation, direct or indirect, the United States gets its revenue. 

11. Is it correct to say that high wages alone prevent us from selling 
manufactured goods in foreign markets ! 



1886-1887. 

1. Compare the economic effects of defraying war expenditures by 
loans and by taxation. 

2. Does the rent of a factory building aftect the value of the goods 
made in it? Does the rent of a farm affect the value of the grain grown 
on it? Does the rent paid for a lot near a great city, from which gravel is 
taken, affect the value of the gravel? 

3. It has been said that "the laws and conditions of the production of 
wealth partake of the character of physical truths. There is nothing 
optional or arbitrary in them." State briefly the laws of the production 
of wealth here referred to, and whether the statement in regard to them is 
true. 



APPENDIX. Ill 

4. It has been said that the law of population and the law of diminish- 
ing returns from land point inevitabl}' to misery and want as the destiny 
of the mass of mankind. What influences aff'ecting the operation of these 
laws are to be taken into account; and if they are taken into account, are 
the laws of population and diminishing returns from land thereby shown 
to be invalid.'' 

5. Explain briefly the nature of the remuneration received by the fol- 
lowing persons : a farmer tilling his own land ; a merchant carrying on 
business with his own capital ; a manufacturer carrying on business with 
borrowed capital; a holder of railway stocks; a holder of government 
bonds; a patentee. 

6. Wherein is the value of metallic money governed by difterent prin- 
ciples from those that regulate the value of commodities in general.' And 
wherein is the value of inconvertible paper money governed by diff"erent 
principles from those that regulate the value of coin. -* 

7. Credit is said to be purchasing power. Explain what is meant by 
this proposition, and in what manner it bears on the theory of the value 
of money. Point out in what form credit, as purchasing power, is most 
likely to affect prices in the United States and in France. 

8. («) Suppose that : 

In the U. S. one day's labor produces 2 bushels of corn ; 
" " " " " " 10 yards of cotton cloth ; 

" England " " "• i bushel of corn ; 

" " " " " 5 yards of cotton cloth. 

Would trade arise between England and the United States.' If so, how.' 
(d) Suppose that in England one day's labor produced 8 yards of cotton 
cloth, other conditions remaining the same as in («). Would trade 
arise.' If so, how.' 

(c) Suppose that in England one day's labor produced 2 yards of cotton 
cloth, other conditions remaining the same as in («). Would trade arise.' 
If so, how.' 

9. Suppose a new article to appear among the exports of a given coun- 
try. Trace the effects in that country on the course of the foreign ex- 
changes ; on the flow of specie ; on the value of money; on the terms of 
international exchange. Would the results be the same if, instead of a 
new article of export, some article pi-eviously exported were to be sold 
abroad in larger quantity because of a lowering of its cost and price.' 

10. («) Arrange in proper order the following items of a bank account: 
Loans, $538,000; Bonds and Stocks, $40,000; Capital, $200,000; Real 
Estate, $26,000; other assets, $26,000; Surplus, $65,100; Deposits $440,- 
000; Notes, $101,550; Cash, 124,000; Cash Items, $52,650. 

^ (^) Suppose the bank to discount four months paper (at 6 per cent) to 
the amount of $10,000 of which it purchases one-half by promises to pay 
the bearer on demand, and one-half by cash. How would the account 
then stand.' 



IV APPENDIX. 

(c) Suppose a borrower to have repaid a loan of $2000 by giving $1000 
in cash, and $1000 in a cheque on the bank. How would the account then 
stand.'' 

(^d) Suppose the bank to be confronted, in a time of general embarass- 
ment, with demands from depositors for cash, and from borrowers for dis- 
counts. What policy would be adopted if it were the Bank of England.'' 
if it were a United States national bank? 



1886-1887. 

DIVISION A. 

1. If taxes levied on the rich cause a diminution in their unproductive 
expenditure, would that in any way affect the employment offered for 
labor .'' Discuss fully. 

2. What principle does Mr. Mill furnish by which the respective shares 
of labor and capital are determined .? Has his Wages-Fund Theory any 
connection with his exposition of the dependence of "profits" on Cost of 
Labor.-" 

3. In discussing the distribution of the product, why is it that the rel- 
ative shares of labor and capital can be discussed independently of rent? 
Would an increase of rent affect the share of labor or of capital ? 

4. Why is it that city banks make a greater use of the deposit liability 
than of the note liability? Why is the fact just the reverse with country 
banks ? 

5. State fully the difference between Cost of Labor and Cost of Pro- 
duction. Would a decrease in Cost of Production affect Cost of Labor in 
any way? 

6. If the returns, and consequently wages, in our extractive industries 
were to decline, how would the course of our foreign trade probably be 
affected ? 

7. Explain carefully how, and under what conditions. Reciprocal 
Demand regulates Normal Value. 

8. How do you reconcile the doctrine of comparative cost in interna- 
tional trade with the fact that a merchant regulates his conduct by a com- 
parison of prices at home with prices abroad? 

9. Explain how a tax on "profits" may fall either (i) on the laborer, or 
(2) on the landlord. 

IG. Discuss the argument that protection raises wages. 
II. Is the customs-duties on sugar economically justified? 



APPENDIX. 



DIVISION B. 



1. Suppose the price of silver to rise to such a point that the ratio of 
silver to gold would be 15 to i, what change would take place in the 
money at present in use in the United States? 

Is such a change probable? if so, why? if not, why not? 

2. State the essential differences between the coinage acts of 1792, 
1834, ^nd 1878. 

3. "All experience has shown that there ai-e periods when, under any 
system of paper money, however carefully guarded, it is impracticable to 
maintain actual coin redemption. Usually contracts will be based on 
current paper money, and it is just that, during a sudden panic or an un- 
reasonable demand for coin, the creditor should not be allowed to demand 
payment in other than the currency in which the debt was contracted. 
To meet this contingency, it would seem to be right to maintain the legal 
tender qualit}' of United States notes. If they are not at par with coin, 
it is the fault of the Government and not of the debtor, or rather it is the 
result of an unforeseen stringency not contemplated by the contracting 
parties." From the Report of the Treasury, dated December, 1887. 

Under what circumstances was this passage written? Is the recommen- 
dation made by it a wise one ? Has it been acted on ? 

4. Ten men club together to buy flour at wholesale, each taking a part 
and paying his share of the price. Ten others club together, borrow 
money jointly, and lend it out to themselves for aid in carrying on their 
trades. A third ten club together, set up a work shop on joint account 
and work in it, and periodically divide the net proceeds. 

What kinds of cooperation are typified, respectively, by these proceed- 
ings? In what countries has each kind been most widely applied? 
Which seems to you to be of greatest intrinsic interest for the social 
question? 

5. What is meant by the eight-hour law? Wherein does it resemble, 
and wherein differ from, factory legislation, in England? 

6. Compare the regulations of the Knights of Labor in regard to 
strikes with those of an English Trades-Union. 

7. "The present doctrine is that the workman's interests .are linked to 
those of other workmen, and the employer's interests to those of other 
employers. Eventually it will be seen that industrial divisions should be 
perpendicular, not horizontal." Explain what is meant by this passage; 
state by what devices it is endeavored to promote the " horizontal" and 
the "perpendicular" divisions, respectively; and give an opinion as to 
which line of division is likely to endure. 

8. The declaration of principles of Knights of Labor demands "the 
enactment of laws providing for arbitration between employers and em- 
ployed, and to enforce the decision of the arbitrators." Is it desirable to 
comply with that demand in whole, in part, or not at all? 



APPENHIX. 



9- Suppose a tax were levied of ten per cent on the house-rent paid b_v 
every person, those who occupied their own houses being assessed for the 
letting value of their dwellings. Would such a tax be direct or indirect? 
Would it conform to the principle of equality of taxation ? Give your 



1SS7-1S8S. 

1. Is productive consumption necessarily consumption of capital? 
Can there be unproductive consumption of capital? 

2. Distinguish which of the following commodities are capital, and, 
as to those that are capital, distinguish which you would call fixed capital 
and which circulating 

A ton of pig iron ; a plough ; a package of tobacco ; a loaf of bread ; a 
dwelling-house. 

Can you reconcile the statement that one or other of these commodities 
is or is not capital with the proposition that the intention of the owner 
determines whether an article shall or shall not be capital? 

3. Suppose an inconvertible paper money to be issued, of half the 
amount of specie previously in circulation. Trace the effects (i) in a 
country carrying on trade with other countries, (2) in a country shut off 
from trade with other countries. 

4. Explain in what manner the proposition that the value ofcommod- 
ities is governed by their cost of production applies to wheat, to iron 
nails, and to gold bullion. 

5. Explain the proposition that rent does not enter into the cost of 
production. Does it hold good of the rent paid for a factory building? of 
the rent paid for agricultural land? 

6. It has been said that wages depend («) on the price of food, (3) on 
the standard of living of the laborers, (c) on the ratio between capital and 
population. Are these propositions consistent with each other? Are 
they sound? 

7. Suppose that 

One day's labor in the United States produces 10 pounds of copper, 
" " " " England " S 

" " " " United States " 5 " " tin, 

" " '• '• England " 5 " " " 

Would trade arise between England and the United States, and if so, how? 
Suppose that, other tilings remaining as above, one day's labor in Eng- 
land produced 12 pounds of copper, would trade arise, and if so, how? 

8. Explain what is meant when it is said that "there are two senses in 
which a country obtains commodities more cheaply by foreign trade : in 
the sense of value, and in the sense of cost." 



APPENDIX. Vll 

9. Arrange in proper order the following items of a bank account : 
Capital, $300,00; Bonds and Stocks, $35,000; Real estate and fixtures, 
$20,000; Other assets, $20,000; Surplus, $80,000: Undivided Profits,. 
$10,500; Notes, $90,000; Cash, $110,000; Cash items, $90,000; Deposits, 
$850,000; Loans, $1,050,000; Expenses, $5,500. 

Suppose loans are repaid to this bank to the amount of $100,000. one 
half by cancelling deposits, one quarter in its own notes, and one quarter 
in cash; how will the account then stand.? 

10. What is the efi:ect of the use of credit on the value of money.'' 
Wherein does credit in the form of bank deposits exercise an efl:ect on the 
value of money different from that of credit in the form of bank notes.'' 

Mid-year. 1S88. 



INDEX. 



PAGE. 

Clearing House 48 

Communists 77 

Cost of Production .... 37 

Crisis 49 

Domestic Manufactures ... 69 

Fisheries 41 

Gas and Coke 53 

Government Loans .... 7 

Gresham's Law 46 

Individual Property .... 17 

Interest 28 

Law of Diminishing Returns . 14 

" International Demand 28 

" Malthus 12 

Legal Coins in the U. S. . . 47 

Margin of Cultivation ... 31 

Mines 41 

Money Wages 71 

Multiple Standard 43 



FAGE 

Mutton and Wool, like Gas . 53 

New Exports, Effects of . . . 64 

Noncompeting groups ... 27 

Patents 41 

Premium 61 

Price, Definition of .... 33 

Productive Consumption . . 4 

Real Wages 70 

Remedies for Overpopulation . 19 

Rule for Determining Trade . 56 

Shipping Point 62 

Socialists 17 

Stationary State 13 

Unproductive Consumption . 4 

Use, Definition of 33 

Value, Definition of .... 33 

Wages Fund Theory .... 22 

Wealth, Definition of . . . 4 



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